The NFT Gold Rush Continues
When Beeple’s Everydays: the First 5000 Days sold in March for $69 million, doubters might have called that moment “peak NFT.” How could a JPEG sell for such an absurd amount of money?
Yet the gold rush has continued unabated. Last week, the average CryptoPunk sale exceeded $500,000 for the first time — not bad for a project that you could have bought for $50 at one point. And that $200 CryptoKitty my partner and I bought on a whim in 2017 would have netted us several thousand dollars today — if we kept our wallet password in a more memorable place.
The mania will eventually slow: the number of new NFTs is potentially infinite, while the dollars used to buy them are not (CryptoPunk prices have already dropped 8% over the weekend). But until the bottom completely falls out of the market, there’s nothing stopping investors from speculating on digital collectibles in hopes of short-term profits.
Terra to the Moon?
When cryptocurrencies fell during the flash crash last week, I urged investors to rebalance their portfolio (i.e., buy the dip). The sudden fall in Bitcoin (CCC:BTC-USD) prices made some higher-quality coins look like bargain bin must-haves.
Since then, my pick Terra (CCC:LUNA-USD) has returned 26%, outperforming Bitcoin’s -3% decline by a wide margin. Investors who rebalanced their “next-Cardano” (CCC:ADA-USD) portfolio on my recommendation would have escaped the worst of the selloff.
Of course, investors need to remember that no cryptocurrency has any “intrinsic value.” Much like NFTs or the size of Wall Street bonuses, crypto prices are only based on the maximum figure that all stakeholders are willing to accept. Swedish central bank governor Stefan Ingves had a point when he compared Bitcoin to trading in stamps.
The DeFi Revolution
Yet a certain class of cryptocurrencies — Decentralized Finance (DeFi) tokens — is becoming more important than ever. These coins grease the wheels of crypto finance, allowing investors to trade in liquidity pools that lower transaction fees.
As investors increasingly rely on decentralized finance, here are five coins to know.
- Binance Coin (CCC:BNB-USD). Launched in 2017, BNB has become the largest DeFi-like token for good reason: it’s cheap to use. Buying $200 of SafeMoon on the BNB network costs $1.73 in transaction fees, while doing the same with Shiba Inu on the Ethereum network will run you $21.16. Though technically not a DeFi token, BNB acts enough like one to make it a top DeFi choice.
- Pancakeswap (CCC:CAKE-USD). The world’s largest DeFi platform by number of users has a lot going for it — a large developer base, low fees, simple setup and strong security. Investors can also “farm” cryptocurrencies using Pancakeswap, earning up to 300% APR on thinly traded coins.
- Uniswap (CCC:UNI-USD). Ethereum’s (CCC:ETH-USD) competitor to PancakeSwap has likewise become a powerful DeFi platform in its own right. As the largest Ethereum-based Automated Market Maker (AMM) by market cap, this token creates “liquidity pools” where liquidity providers receive a small commission for each purchase. It’s a system that improves with scale since more liquidity providers can help reduce fees over time.
- Chainlink (CCC:LINK-USD). If a blockchain smart contract is programmed to send payment on product delivery, how does that contract “know” when such a delivery has occurred? Enter Chainlink, a crypto “oracle” that draws in data from the outside world. And as the largest oracle in the industry, Chainlink looks set to grow as smart contracts take hold.
- Terra. I’ve recommended Terra before — but it deserves a second mention. The cryptocurrency has created an entire ecosystem of stablecoins and payments systems that has proved particularly popular among South Korean merchants. If lead developer Terraform Labs has it their way, Terra could one day rival incumbents from PayPal (NASDAQ:PYPL) to Western Union (NYSE:WU).
Smart investors will notice these five picks are the relatively larger DeFi players. That’s by design. Larger liquidity pools are more attractive to traders, meaning that dominant players will tend to succeed over smaller ones.
Robinhood and Coinbase Are Stalling Out
When Robinhood (NASDAQ:HOOD) and Coinbase (NASDAQ:COIN) listed earlier this year, it was supposed to be a coup for “new finance” companies. Here were two exchanges that could upend every legacy player from Charles Schwab (NYSE:SCHW) to Vanguard.
Their size, however, has turned into a millstone for these upstart firms. Robinhood is down -50% from its post-IPO high, while Coinbase is off -40%. Pity the investor who bought in late.
Essentially, both firms have belatedly realized that the Securities and Exchange Commission is a monster with a thousand teeth and rather bad breath. Grey-market finance — such as Payment for Order Flow (PFOF) and non-bank crypto lending — has triggered alarms in Washington. Not only can these products mislead investors — they can also create the kinds of systemic financial risk the government rightly fears.
DeFi platforms have also threatened Coinbase and Robinhood’s business models: why suffer Robinhood’s poor execution prices when you can trade directly with market makers?
The tide, of course, could eventually turn. The SEC will have to let Coinbase and Robinhood resume their normal operations eventually if they want to avoid an entire “shadow banking” system forming behind their backs. But how soon that happens is more of a political question than a business one.
Biotech, Travel and… Nuclear Energy?
Biotech has long been fertile ground for Moonshots. But the industry is also a hotbed of fraud and inflated promises. Chris Lau takes a closer look at how controversial Cassava Sciences (NASDAQ:SAVA) stock could pay off for bold investors.
When travel eventually returns, there’s an underdog that’s set to soar, according to InvestorPlace’s Eric Fry. “People are traveling again… and this company is benefiting.”
There’s a new unexpected Moonshot in town: uranium. As supplies of nuclear fuel tightens, one particular company stands to benefit most, according to Sam O’Brient.
The CryptoPunks Saga
|10,000||The total number of CryptoPunks minted.|
|$50||Average sale price for individual CryptoPunks during the initial release in June 2017. Some CryptoPunks were given away for free during launch.|
|-20%||Return of the average CryptoPunk after 30 months. Values of NFTs plummeted when cryptocurrencies fell after the 2018 bubble burst.|
|+1,130,000%||Return of the average CryptoPunk since then. Average sale prices peaked at $512,000 over the weekend.|
Why is the SEC So Scared of Crypto?
In late February, the New York Attorney General’s office reached a settlement with Bitfinex, the parent company of Tether (CCC:USDT-USD).
“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” New York Attorney General Leticia James said in her official statement. “These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities.”
The regulatory battle however, is far from over. Margin lending — a key factor that caused both the 1929 U.S stock market crash and the 2015 Chinese one — runs rampant in the crypto world; investors can leverage up to 125x or more.
And systemic issues with stablecoins are growing. Tether is only 26% backed by cash, with the remaining 74% spread between commercial paper and corporate bonds. A rapid draw-down could trigger a liquidity mismatch — a root cause of the 2008 financial crisis.
In other words, today’s unregulated cryptocurrency market is starting to look a lot like the worst Wall Street excesses.
Perhaps government regulators will get their act together before the crypto markets implode. But if history is a guide, it will take a great reckoning before that happens.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.