September 02, 2024 | Read Online

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"Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that."

— Adam Smith, Wealth of Nations

We're trying something new today: Instead of dragooning a colleague to guest write for me while I celebrate Labor Day (by not laboring), I've carefully chosen a commentary from the back catalog to replay for you.

It's the first "best of" edition of the newsletter.

If you've been a reader long enough to remember this one (on what monkeys can teach us about money, trading and crypto), thank you! You can stop here and have four minutes of your day back.

If you haven't been a reader for that long (or simply don't remember it), have a look. I think it's a fun one.

Either way, thanks for being a reader!

Monkey Business

The great economist Adam Smith argued that the distinguishing attribute of humanity — the singular thing that sets humans apart from animals — is the use of money.

But when Yale economist Keith Chen introduced fiat money into a colony of capuchin monkeys, they caught on quickly.

They learned they could trade money for food, that different foods have different prices and that prices fluctuate.

Once they got the basics, the monkeys were put through a series of tests familiar to behavioral economists.

The findings were pretty familiar, too: "Capuchin monkeys react rationally to both price and wealth shocks," the study found. But irrationally when faced with "more complex choices including risky gambles."

In that, they are exactly like humans: "They display many of the hallmark biases of human behavior, including reference-dependent choices and loss-aversion."

That was not the capuchins' only human-like behavior: They spent all their money as soon as they got it, stole it from other monkeys when they ran out and gambled it for more when given a chance.

Most salaciously, they traded it for sex.

This is a family-friendly newsletter, so I report that finding with great reluctance and strictly because it's of primary importance (and not just for primates): Yale's economists only intended the money tokens they introduced to be traded for food — but the monkeys soon figured out that they could trade it for anything.

Which is to say, they understood that fungibility is the defining aspect of money: The monkey who charged for its corporeal services immediately traded the token it earned for a grape.

I know that's what you'd like the rest of this newsletter to be about, but we're meant to be talking about investing here, so let's get back on track:

The capuchin monkeys' behavior in gambling, Chen said, "make them statistically indistinguishable from most stock market investors."

As a long-time stock market investor, I don't need to check Chen's data to know that he's right.

Aping in

If something is tradeable, people will trade it.

This behavior is innate, not learned — as demonstrated by both capuchin monkeys and stock market investors.

The result is that every listed investment trades too often, which diminishes returns.

Crypto, however, has taken this to a new level.

People most equate crypto tokens with equities, but that's just because they look like equities — they're squiggly lines on a chart that you can trade in and out of every day.

Fundamentally though, crypto tokens are ultra-long-dated assets with minimal revenue, unproven business models, few customers, unfinished products and speculative use cases.

That doesn't necessarily make them bad investments, it just makes them an investment that is more akin to venture capital and angel investing than listed equities.

Venture and angel investing is about buying lottery tickets, with most going to zero and an occasional big winner going all the way to a stock market listing. No trading required.

Crypto tokens, however, start out with the stock market listing — they are publicly listed, private-market assets.

This is oxymoronic: The definition of a private market is that you can't trade it. But crypto is a private market that you can.

Private markets — real estate, private credit, private equity, infrastructure — is a $10 trillion asset class.

Crypto, at its peak market capitalization of $3 trillion, was relatively too big in comparison. And at its current market cap of $1.1 trillion, I'd guess it still is.

That is admittedly not a highly scientific assessment.

But when I see things like Aptos trading at a $15 billion valuation, I can only think that despite the bear market, there is still too much money chasing too few crypto investments.

Monkey see, monkey do

There's too much money chasing traditional VC too, as Marc Andreessen noted in a recent podcast: "The world we live in has a massive imbalance of too much money chasing too few opportunities. There's just too much money...that looks to venture as part of their asset allocation."

That means lower returns for VC investors. With their 10-year holding periods, however, they won't notice for a while.

For crypto investors, the consequences may be more dire.

In addition to creating valuations from which it's nigh impossible to make a positive return, tradeable tokens disincentivize long-term thinking — why do the hard work of building a startup business ("chewing glass" in Andreessen's phrase) when you can flip your tokens for a quick profit and move on to the next thing?

This creates a problem of perception as well: Booming token prices make crypto look like nothing more than a casino.

And crashing token prices make crypto look like it's not working, even when it is.

Markets are a study in psychology (and primatology?) as much as they are in economics.

If something is tradeable, we can't help but trade it, even if it's almost certainly a bad idea (which trading crypto usually is).

Investors and the industry would be better off if crypto tokens traded far less than they do.

But, like a monkey turning a token into a grape, we can't help ourselves.

— Byron Gilliam

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Lina Seiche @LinaSeiche

Fun fact, I posted my first comic around the time #Bitcoin was stuck at $9,000 after the halving and we could all tell it was just a matter of time until it would take off - it was a question of "when," not "if."

$58,000 gives me flashbacks, just saying 🙂