June 27, 2024 | Read Online

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"He who sells what isn't his'n, must buy it back or go to pris'n."

— Daniel Drew (~1890)

Thursday short mailbag

Q: Should I short crypto?

I've always advised people that shorting is a dangerously bad idea, for the obvious reason that your upside on a short position is capped (prices can't go down more than 100%) and your downside is uncapped (prices can go to infinity).

That advice seems extra applicable to crypto, as tokens have historically been more likely than stocks to go to infinity, often for no particular reason.

But it doesn't really feel like that anymore, does it?

Instead, the upside in crypto seems to be capped by a combination of ever-increasing supply and stagnant demand.

In equities, it's the opposite: Companies buy back shares, the pool of buyers is always growing and the number of stocks available to buy tends to shrink. There are less than 5,000 stocks listed in the US now, down from over 8,000 in 1996.

This structural imbalance of shrinking supply and growing demand is why US stocks go up most of the time — so it's logical that its opposite would make crypto tokens go down most of the time.

When they go down also feels more predictable than it does with stocks.

I have an unsubstantiated theory that automated market makers (where people passively provide liquidity to traders on DEXs) make token prices more mean-reverting than stock prices.

(If someone more technical and less lazy than me could please backtest that and report back, that would be great. Thanks!)

More quantifiably, short trades in crypto are usually less "crowded" than they are in equities.

For example, a company with a $1 billion market cap and negligible business prospects would be a popular (ie, crowded) short in the stock market — so popular that you'd probably pay an annualized 50%+ to secure the borrow you needed to short it.

By contrast, there are lots of $1 billion cryptos with negligible business prospects — but in most cases, you get paid to short them. (The funding rates on perpetual futures are usually positive.)

Paying 50% to borrow equities vs. being paid 1 or 2% to borrow tokens is a measure of how little competition you have as a short seller in crypto.

Another measure: Stock market investors pay a lot of attention to what management is doing with their personal shares — NVIDIA traded sharply lower this week on news that its CEO had sold a small portion of his holding.

By contrast, crypto insiders are often willing to sell their locked tokens at a 70% discount to prevailing market prices.

Imagine how eager short sellers would be to sell the stock of a company whose CEO was willing to sell it down 70%.

Why would crypto insiders be so bearish?

I imagine they're looking at the yawning gap between market capitalization (the tokens in circulation) and fully diluted value (the additional tokens likely to enter circulation over time) that exists for most tokens.

The gradual closing of that gap will be a constant headwind for token prices over the next couple of years in much the same way that share buybacks are a constant tailwind for stock prices.

So yeah, given the current oversupply of crypto tokens, I suspect shorting them will be easier than shorting equities.

That doesn't mean it'll be easy, though — shorting never is.

Q: Should I short memecoins?

Shorting something that has no intrinsic value is counterintuitively more dangerous than shorting something that does.

Memecoins are infinitely overvalued, which sounds like something you'd want to be short.

But an infinitely overvalued memecoin can double or triple and not be any more overvalued — double or triple infinity is still just infinity.

So "overvalued," on its own, is not a reason to short them.

Nor are fundamentals, since memecoins don't have any.

The only reason to short a memecoin is if you think supply will be greater than demand — which is increasingly what it feels like.

Consider Iggy Azalea's MOTHER token, which despite being widely regarded as a very good meme, is struggling to maintain a $75 million market cap.

If MOTHER had launched six months ago, I suspect it would be worth 10x that.

Today, though, it feels like there is simply too much competition for the same crypto dollars to support yet another $1 billion market cap.

A counterpoint to that is BRETT, which does not have a particularly engaging meme (in my opinion) but has nonetheless shot to a $1.5 billion market cap.

But this, too, seems bearish to me.

Weirdly, BRETT started at a market cap of $350 million and that, to me, makes its current valuation feel highly contrived.

The emphasis here is on "feel" (I have no evidence) — but who is the marginal buyer of a memecoin that's been socially engineered to a $1.5 billion market cap?

Chances are, whoever socially engineered it will soon be looking to move on to the next one — memecoins remain a zero-sum game of a fixed pool of money rotating from one coin to the next.

The one thing memecoins had going for them is that early adopters of a new coin could often get in at market caps in the single-digit millions — even at $75 million, early believers have still made 10x their money.

But memecoins launching at $350 million feels a lot like the VC coins that launch at billion-dollar valuations and then trade down-only.

If that becomes the new model for memecoins, they might well be shortable too.

Q: Should I short NVIDIA?

That has been an unthinkably bad idea — right up until this week, when people seemed to have started thinking about it.

That's not because NVIDIA has gotten expensive (it's gotten cheaper on most metrics); it's because there's a growing sense that AI infrastructure is being overbuilt.

A research note from Barclays estimates that Google's capex plans are predicated on AI queries being 15-20x greater than web searches by 2026 and that the industry as a whole is building enough capacity to accommodate the equivalent of 12,000 new ChatGPTs.

12,000!

That suggests the current level of spending on NVIDIA GPUs may be dangerously field-of-dreams speculative: Build it and hope they will come.

If NVIDIA's customers start to question whether we're definitely going to find uses for all that capacity, they could quickly go from ordering as many GPUs as they can possibly get to ordering none at all.

It happens in every semiconductor cycle, and that's of course when you want to be short on those stocks.

This time around, with NVIDIA becoming so all-important, it's probably the single biggest risk to all markets over the next year or so.

Q: You know there's an election this year, right?

I have heard that, yes, but I don't think the outcome, however it goes, poses any immediate downside risks to markets.

If Nate Silver's model proves correct, I do think resurgent inflation (due to tariffs, deportations and a politicized Fed) will be a major risk to markets.

But that's probably a 2026 story and the market would probably go up some before it goes down a lot, so I'm not going to worry about it just yet.

I'm also not going to watch the debate tonight —- because politics is the one thing I think is always a short.

— Byron Gilliam

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Mippo 🟪 @MikeIppolito_

Replying to@MikeIppolito_

PBS is almost definitely the right philosophy, but we've pushed it to an extreme today.

Just because we can divvy up consensus responsibilities between parties doesn't mean 95% should be going to one group.

We need more nuanced discussion around what the right balance is.

3:45 PM • Jun 27, 2024

4 Likes 0 Retweets

2 Replies

wishful cynic @EvgenyGaevoy

My 2 cents:

- there is near zero chance SOL ETF will get approved this year (wishful thinking that it will be somehow a priority for Trump admin is rather silly)
- once you see how little inflows there will be into ETH ETFs (this year), it will be clear how even less flows SOL… x.com/i/web/status/1…

1:49 PM • Jun 27, 2024

913 Likes 20 Retweets

74 Replies

Michael Green @profplum99

Blame the Atlanta Fed too... just like passive investing beats most active managers by delivering the average return every day, statistics quoting the Atlanta Fed median wage survey misunderstand cumulative reality

tw profile: Adam Ozimek Adam Ozimek @ModeledBehavior

In their essays for EIG today, both Krugman and Strain offer reasons why people may be more negative than the data suggests they should be. I would offer an additional theory: blame the BLS and FRED.

Seriously? Yes. Stay with me for a moment...