Elon Musk Tweets: Great News For Bitcoin, Bad News for Econ Majors

Assorted Elon Musk things

I wrote the other day that “the way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk,” and I am already tired of it. It was a joke? But in a couple of years there are going to be 800-page textbooks on Elon Musk Proximity Pricing; it will be a whole unit on Level 1 of the CFA. You might think that “did Elon Musk tweet about a thing” would be a simpler valuation metric than, like, “estimate its cash flows in perpetuity and apply an appropriate discount rate,” but I don’t know, there’s a lot going on.

First of all, yesterday I quoted a Reddit post from someone named “u/TSLAinsider,” dated Jan. 2, saying that he was a Tesla Inc. software developer and that Tesla had just bought $800 million worth of Bitcoin. I expressed some skepticism about this—“for all I know this was completely fake,” I wrote—but on the other hand Tesla did buy $1.5 billion worth of Bitcoin in January so, you know, good call. In the event it does seem to have been fake:

“If you want to know the truth: I am a young German guy and I was on Acid while I did this post in the last month,” the user told The Post in an email on Tuesday. “I had this afflatus that Elon is going to buy Bitcoin, so I created this trollpost. And now all the newspapers around the globe are writing about it, its kinda funny and scary to be honest.”

Hendrik, who asked to be identified only by his first name, said he got an intuition that Tesla would invest in Bitcoin after seeing a December Twitter exchange between Musk and MicroStrategy CEO Michael Saylor, whose business-intelligence firm bought more than $1 billion worth of the digital currency last year.

“Me and my girlfriend, we took acid, and I saw the conversation between Michael Saylor and Elon Musk on Twitter, and I was like, yeah, why shouldn’t he buy into bitcoin?” Hendrik told The Post in a Tuesday Zoom interview from Germany. “He’s crazy and he has a lot of money, so why not?”

That’s cool. I hope he has already been hired by a hedge fund and received an ample budget for acid. If you bought Bitcoin based on his post, you’re up about 50% in a month, but that’s nothing, that’s just a tiny free sample of what this kid can do for your portfolio. Somehow he has an intuitive connection with Elon Musk—the principal source of financial value in the world—that is activated by hallucinogens. He had an afflatus! Out there on the astral plane, Hendrik can peek into Musk’s portfolio, even his future portfolio.

 That is maybe the most valuable skill in the investing world right now; surely someone has snapped him up.

Second, yesterday we discussed whether, if this had been real, it would be insider trading. Well, not this—this is just posting on Reddit—but if instead of posting about it on Reddit, a Tesla insider had bought Bitcoin knowing that his employer was buying it too, would that be illegal? I don’t know, man. Bitcoin is not a security, but it is a commodity, in the sense that the U.S. Commodity Futures Trading Commission treats it as one and claims jurisdiction to regulate it.

And while there is a traditional view that “there’s no such thing as insider trading in commodity markets”—nobody is an insider with respect to, like, oil, so anyone can trade it freely—that is changing, and the CFTC now does sometimes go after people who misuse their employers’ confidential information to trade commodities. I guess this fits.

Still it’s weird. If you work for a car company and learn that it’s buying euros, you can still buy euros, not just because the euro is not a commodity (it’s a currency—as Bitcoin isn’t quite—though it kind of is?), but also because the euro is in a sense bigger than your company. What you learn about your company’s position probably isn’t that material to the euro market, and also you aren’t necessarily buying euros as a speculative trade; maybe you’re buying them because you’re going on vacation in Europe. If you work for a company and it buys gasoline for its delivery trucks, you can still buy gas for your car. Obviously in this case (1) Tesla’s announcement that it bought Bitcoin was predictably material for Bitcoin and (2) price speculation is a major reason that people buy Bitcoin, but it does feel like there’d be difficult line-drawing exercises. If you’re a Bitcoin enthusiast who buys Bitcoins whenever the price looks attractive, and you work for a smallish public company that launches a not-yet-disclosed Bitcoin-buying program, do you have to stop buying Bitcoins? Do you have material nonpublic information? About Bitcoin? How can you be sure?

Though of course, under the Elon Market Hypothesis, the hypothetical Tesla insider’s case is an easy one: You know the single most material thing it is possible to know about a financial asset (that Elon Musk is buying it), so you are not allowed to trade it. 

Third, here is “A Brief History of Elon Musk’s Devotion to the Crypto Cause”:

November 2017

For many observers it started when a blog post shared on digital-currency sites suggests Musk is Satoshi Nakamoto, the mysterious cryptocurrency founder. The billionaire rejects the claim and says he forgot where he put his Bitcoin.

Etc. Imagine if Tesla forgets where it put its $1.5 billion of Bitcoin. Tesla is an $800 billion company that sometimes seems like it’s being run as one guy’s hobby, and it’s not too hard to imagine that its cryptocurrency custody policy is, like, “Elon will write the private key on a matchbook and try not to lose it.” And then he’ll burn up the key in a space-flamethrower accident, and the next 10-Q will sheepishly announce “we wrote down our Bitcoin holdings to zero this quarter because Elon burned them, oops,” and … surely Tesla stock would go up? Surely Bitcoin would go up? I don’t know, that would just be a cool funny thing to happen, and isn’t Tesla’s valuation based mostly on Elon Musk doing cool funny things? You can find a formal proof of this in the appendix to Chapter 18 of the Elon Musk Proximity Pricing Reference Manual for Investment Professionals.

Fourth, here is a website called “Elon Stocks,” which promises to send you a text “when Elon mentions a stock in a tweet.” (I cannot advise you either on investing strategy, or on the wisdom of typing your phone number into a random website, but I mention it here purely for entertainment purposes.) I assume they are working on a premium high-speed direct feed to alert high-frequency traders to Musk’s tweets microseconds before everyone else. I hope Twitter Inc. is doing that, actually. 

Fifth, this is not exactly about Musk but I am going to throw it in here anyway:

Are you a WallStreetBets member with good karma looking to make the move from trading your own account to working for the establishment? If so, Cindicator Capital, an offshoot of alternative data provider Cindicator, has the job for you.

The New York-based quantitative fund posted a job opening on LinkedIn four days ago seeking applicants for a sentiment trader position.

Requirements include three years of active trading experience and, crucially, having been a member of WallStreetBets for more than a year with karma — a Reddit measure of “how much good the user has done” for the community — of more than 1,000. Bonus points go to those with a “refined taste for memes and a sense of humour.”

Another not-so-traditional precondition: Those who studied economics or finance in college need not apply. And if that’s not enough, be ready to prove that you’re “free from any mainstream financial brainwash” in order to land the gig.

You don’t need economics anymore, you need memes, I’m so sorry.

SCALE

True story, if I was not sitting here typing in this box right now, I’d probably be working in equity capital markets at a big investment bank,

 but in the “weird equity capital markets” side of the business, the side that comes up with new products and then, crucially, bestows acronyms upon them. SCALE!

It’s a real good one. (Credit to Morgan Stanley for dreaming it up,

 and to Julian Klymochko for pointing it out to me.) For one thing, the acronym is a real word with largely pleasant connotations in the business context. (“Returns to SCALE!,” you can say, if your SCALEs go up.) Though in this particular context—the initial public offering of a special-purpose acquisition company named “NightDragon Acquisition Corp.” for some reason

—I assume the SCALEs are the … dragon’s scales? Like if you do a SCALE for a SPAC called SoftBunny Acquisition Corp., do you have to name it something else? Freely Listed Units For Founder Incentive Execution Stimulation (FLUFFIES)?

Also the words that the acronym stands for are absolute gibberish, which is a sign of professionalism in these matters. Stakeholder-Centered Aligned Listed Equity! It sounds like a good thing, it vaguely gestures at what they’re doing, but it doesn’t describe it (what stakeholders?), and it does not quite read like English. Some Company’s Acquired; Later I get Extra Shares (SCALES) sounds a bit more human and conveys a bit more of what is going on, but those are not qualities you are looking for in a financial acronym.

It’s terrific. My only note is that it is somewhat traditional, in the very highest-end financial acronyms, to use letters that are not the first letters of the words. Or use, like, the first and third letters, or whatever. Just mess it up a little, add a bit of sprezzatura. Stakeholder inCentive vALue Equity Securities (SCALES), now you’ve really got something.

Also I guess we should talk about the product? NightDragon is a new SPAC, a blank-check company that will go public by raising a pot of cash and will then go out and look for a company to take public by merger. SPACs are traditionally brought to market by sponsors, famous investors or operators or athletes who do the work of looking for a company to acquire and, in exchange, get 20% of the SPAC’s equity more or less for free. “In other words,” writes Andrew Ross Sorkin in his column today, “if a Wall Street executive or celebrity raises $500 million from public investors, that person gets a stake worth $100 million, irrespective of how well the stock of the combined group performs over time.” 

But the SCALE is a change to the SPAC structure to address that issue: The SCALE sponsors don’t get most of their reward unless the merged company performs well after the merger.

 The idea is that this is good for the people who buy into the SPAC: The sponsor’s incentive is not just to do any deal, but to find and negotiate a good one so that the stock trades up. It’s also arguably good for the company that merges with the SPAC—its shareholders are diluted less, unless it performs well—which might make it easier for the SCALE SPAC to find a good target and make a good deal.

 Incentives are aligned! With the stakeholders! Who are centered! Listed! Equity! It says it right in the name.

One other point that I want to make here is that SPACs are absolutely an enormously lucrative investment banking product that banks love and devote lots of resources to marketing. I made this point last month, after equity capital markets groups at big banks reported huge profits because of the bonanza of SPAC deals, and I don’t want to spend too much time harping on it because I don’t really think that, at this point, too many people actually think things like “SPACs are a way to cut out Wall Street banks and go public without all the fees of an initial public offering.” But if you do think that, consider that Wall Street banks are inventing new ways to do SPACs, and giving them fun acronymic names, because they are in gleeful competition to do as many SPACs as possible. Perhaps they like SPACs?

Good hedge funds

Congrats everyone:

The estimated sum is $23.2 billion, and it’s the amount that the hedge fund managers on Bloomberg’s annual list of the top 15 earners collectively made in 2020, a year that will loom large in the annals of Wall Street.

Amid Covid-19, Black Lives Matter, Brexit and more, almost all of these money managers would have become billionaires in a single year — had most of them not been billionaires already. The biggest winner, Chase Coleman, gained $3 billion personally in 2020, according to the Bloomberg Billionaires Index.

The rewards are unlike anything the hedge-fund industry has ever seen. So, too, is the jarring context: the once-in-a-century pandemic, the stay-at-home economy and, now, the spectacle of millions of amateur investors crowd-sourcing their buying power online to battle the pros over GameStop, AMC and other stocks.

Wait a minute. There was some online buzz about GameStop Corp. in 2020, but “the spectacle of millions of amateur investors crowd-sourcing their buying power online to battle the pros over GameStop” was absolutely a 2021 phenomenon. The trade of 2020 was the pandemic; I recognize that that is a callous way to put it, but if you are a hedge fund manager you have to position your portfolio for terrible global events, not just be sad about them. Getting the pandemic right, being short credit at the right time (as Bill Ackman was, landing him at No. 9 on the list), or being long stay-at-home tech companies at the right time (“Even before the world had heard of Wuhan or wet markets, Coleman’s New York-based firm had built substantial stakes in Zoom, Peloton and JD.com”), or betting on the recovery at the lows: Those were the ways to make a lot of money in 2020. (Also SPACs, SPACs were the other big trade of 2020.)

The fact is that the S&P 500 Index was up 16% in 2020, as the global pandemic was a strange sort of economic disaster that was broadly good for financial assets. Still the general point is that if you invest in hedge funds, one thing that you are probably looking for is the ability to provide good returns even in difficult market conditions. “If, say, a catastrophic pandemic hits, I want an investment manager who will react nimbly and make money for me,” you might think, and here it worked out for you, though unexpectedly an index fund would have done okay too.

Also in difficult market conditions you might expect more dispersion of hedge fund results: “The top 15 hedge funds by performance had a great year because markets were crazy” is not quite the same thing as “hedge funds had a great year because markets were crazy.” Some hedge funds had a bad year; Bridgewater Associates’ “Pure Alpha II fund lost money for a second straight year.” Some hedge funds had good and bad years within the same firm:

Two funds run by fellow quant manager Renaissance Technologies posted losses exceeding 30%. But its Medallion Fund gained 76%, enough to generate an estimated $2.6 billion gain for founder Jim Simons, who retired as chairman last month. Medallion, open only to employees, has achieved annualized returns of about 40% since it debuted in 1988.

Meanwhile, the trade of 2021 is—well, who knows, it’s only February, a lot can happen. But in terms of, uh, number of words of Money Stuff written about it, the trade of 2021 so far is a sort of GameStop-Reddit-meme-stock-Elon-Markets-Hypothesis nonsense trade, a strange offshoot of the pandemic in which too many people are too bored at home and markets are driven by trolling rather than fundamentals. It is possible that that rewards different skills from the pandemic-and-recovery market of 2020. To give you a sense of how different things are, let’s check in with No. 15 on the 2020 list:

Several of the winners in Bloomberg’s ranking have already experienced a rapid reversal of fortune in 2021 as retail traders coordinating on social media wreaked havoc in the market.

Melvin Capital Management’s Gabe Plotkin made about $850 million in 2020 as his firm’s flagship fund returned 53%. But in January, it was caught on the wrong side of the retail mob that pushed up the price of stocks Melvin had bet against. That led to a 53% decline and an estimated $460 million loss for Plotkin personally, illustrating how quickly paper gains can vanish.

“You don’t need economics anymore, you need memes, I’m so sorry,” is perhaps the conclusion again here.

Ant trap

We have talked a few times about the shifting balance of power between entrepreneurs who run hot startups and investors who give them money. My basic view is that once money was worth a lot, and now it’s worth less; once cool business ideas were worth a certain amount, but now they’re worth more. Global markets and electronic communications make it easier to raise money from anywhere; all investors everywhere are in competition to provide capital to the hottest companies. Meanwhile global markets and electronic communications also make it easier for hot companies to scale; if you make a good app, you can distribute it to everyone in the world a lot more easily than you could once have distributed a good ball bearing. Entrepreneurs have relatively more power, which means that they can demand better terms from investors than they used to; they can insist on having more control of their business, treating investors as suppliers of a relatively unimportant input (money) rather than as full partners in the running of the business.

We’ve talked about a few possible limit cases—Snap Inc., WeWork Cos.—but I’m not sure anything in the U.S. tech world can compare to Ant Group Co.:

In 2018, an exclusive group of global private-equity firms and mutual-fund managers including Silver Lake, Warburg Pincus LLC, Carlyle Group Inc. and T. Rowe Price Group Inc. took part in a coveted fundraising by Ant that raised $14 billion and minted the financial-technology giant as the world’s most valuable startup.

More than $10 billion of the money came from international investors, which bought shares in an offshore shell company set up by Ant to raise funds in U.S. dollars. The unusual arrangement came about because in order to secure a payment license to operate Alipay, its highly popular mobile app, Ant had to be domiciled in mainland China. But that also limited the company’s ability to raise funds directly from foreign investors.

The global investors agreed to terms that were highly favorable to Ant, and which limited their ability to cash out if the company didn’t end up going public, according to people familiar with the matter. Ant also didn’t provide a listing time frame or guarantee investors a return while it stayed private, the people added.

The foreign investors didn’t receive any voting rights in Ant, which was valued at $150 billion in the June 2018 deal, the world’s largest-ever startup fundraising. None was given a seat on Ant’s board.

Here is how the Financial Times put it last month:

Under an arrangement between Ant and its so-called international Class C investors, the cash was put into an offshore subsidiary that owns nothing. Aside from not having voting rights, there is little detail of the commercial terms of the agreement in Ant’s heavily redacted IPO prospectus.