Investing Has Never Looked Weirder

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I remember the first time that I opened my Robinhood app and I had made my paycheck. In a day in the first like 10 minutes of the stock market. And I kind of just remember sitting at my desk at home with my computer in front of me, like, should I quit? Like, should I quit?

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard is Renee Arnett. She's not a CEO or a top Wall Street strategist, although we'll hear from some of those in a bit. Renee is an ordinary investor who favors meme cryptocurrency and other extraordinary assets. We'll get her perspective in a moment on what to traditional investors can at times look like madness with daily reports of strange things reaching unlikely market values. Finance is about as weird as it has ever been. Coming up, what does that mean for stock and bond holders?, or for those who wonder if it's too late to dabble in something new, fun, and virtual. Listening in is our audio producer Jackson. Hi Jackson.

Hi Jack.

Our cover story in this week's Barron's Magazine is on what I call weird finance, and you did some reporting for the story. We sent you to New York City's Times Square for NFT NYC, which is a conference promoting non-fungible tokens, which we'll come to. And anyone who knows Times Square knows that's Naked Cowboy territory. I understand you had a run-in and the Naked Cowboy, who's really more of an underpants cowboy, was on assignment too.

Yeah, he was fielding a request from a man and a woman in matching onesies to sing a song about their holographic were.

Well, I'm the Naked Cowboy with the word NFT. It's the cryptocurrency for you and me. I'm the Naked Cowboy with the word NFT. You see, to me, the guy playing guitar in his underpants made more sense than a lot of things in that area. I mean, there was a car that had been built up with junk to resemble a metal cockroach. And it was playing a slowed-down rap song about stacks of cash. "I don't cash, I get stacks of cash, you get cashews." Did he say he counts cash and I count cashews? For the record, at one point I was counting pistachios, but that was part of a low-carb diet. The idea of that car was to market a downtown gallery that displays digital images. Why do digital images need a physical gallery and what does it have to do with stacks of cash? I do not know. There was also a guy with a mirrored face shield and a beanie. He was dressed like one of the CryptoPunks, or online cartoon faces that are drawn with blocky pixels. One CryptoPunk sold this year for more than $11 million. That's a stack of cash. CryptoPunks are an example of non-fungible tokens, or NFTs, which can prove ownership of digital assets and which traders can flip for profits. A set of NFTs representing cartoon ape faces sold this year for over $24 million. Keep in mind, these are not framed one-of-a-kind pieces. They're not even exclusive digital files. They're tokens that let owners say, "That's mine," even though there are identical copies of these images across the internet. Does that make sense? Not to me. But NFTs are just one part of weird finance. Cryptocurrency is a much bigger part. I understand the point of decentralized finance. I don't understand the relationship between the proposed utility of some cryptocurrencies and the market values they've achieved. Those seem like totally detached things—programmers trying to make useful tools or parity coins and speculators bidding prices endlessly higher. The crypto universe is approaching $3 trillion in market value. That's around one quarter the value of all of the world's mined gold. It's close to the money supply of the United Kingdom. We've talked about a dog-themed parody cryptocurrency with unlimited supply called Dogecoin. It recently had a market value of $35 billion, and then it was passed by another dog-themed coin This one, a parody of Dogecoin, which I guess makes it a parody of a parody. It's called Shiba Inu, and that one hit a market value of $40 billion, but then it fell 15% in a day. By the way, Hershey, which is more than a century old and makes sweets in 85 countries, recently had a market value right around those of these joke dog coins. $36 billion. Here's something else from this past week. A crypto called Squid Game, like the Netflix series, which had been a big gainer, suddenly fell to zero. Apparently that one was a scam. It did not set off a panic across the crypto world. And we've already talked about meme stocks like GameStop and AMC Entertainment on past episodes. Those multiplied more than 20 times in value at different points this year. And we covered special purpose acquisition companies, or SPACs. One of those recently jumped 15 times in value after announcing it would merge with something called Trump Media and Technology. Now, maybe that will become a top player in media and technology. I don't know. All it seems to have now is a slide deck with vaguely stated intentions to take on Twitter. And Facebook, and Amazon, Apple, Walt Disney, and Netflix. Don't laugh, Jackson.

That's a lot of companies.

Those companies are pretty good at what they do, but we'll see. When you put all of this stuff together, I don't think there's a parallel in history. Definitely not Dutch tulip mania, which historians have shown wasn't so much a mania as it was rich people engaging in a bit of squander. The South Sea Bubble was a single stock that rose tenfold in a year and set off a rush of low-quality stock offerings. Call it one meme stock and a bunch of SPACs. The dot-com bubble of the late 1990s was more of a mania, and both Japan in the 1980s and the US in the 1920s had profound credit-fueled bubbles that ended with many years of economic pain. But if we're just judging on weirdness, those involved real estate and stocks. No CryptoPunks, no dueling dog coins. Today, there seems to be a bubble of bubbles across real and virtual assets. Not everything is overpriced, but if there were a financial index tracking weirdness, I'm pretty sure it would have gone vertical and smashed through all-time highs. All that said, I don't think the people trading in these assets are necessarily ill-informed or misguided. Many seem perfectly rational, and of course, many are making good money. And Jackson, that brings us to your conversation with Renee, who was in Times Square to promote a planned NFT marketplace called Snow Crash. But who also told you about her personal investing approach. That's right.

Renee grew up in small-town Florida and learned how to trade during the pandemic. And then when the stock market crashed and workers were sent home or laid off, she turned to YouTube videos and podcasts.

If there was ever a time to figure out how to create your own wealth, it was when you were fired. It was when you were let go. It was when the whole world was shut down. There was nowhere else to go. And so that's what I did. I spent some time studying stock options, how to trade, how to invest, what is delta, what are these Greeks, how do I read charts, what is technical analysis? And I figured it out. And I remember the first time that I opened my Robinhood app and I had made like my paycheck in a day in the first like 10 minutes of the stock market.

Renee says she taught her mother, who's a teacher, and her younger siblings and friends to trade. I asked what's in her portfolio.

So my options are, I would say, my daily plays. My crypto is what I consider my long-term investment. So I own Solana, I own Tezos, I own a little bit of Bitcoin, not a whole bunch. I own Ethereum, on Ethereum Classic, I own Litecoin, I own Filecoin, I own a few of the meme coins, of course. I own Shiba, I own Doge, I just bought ElonX last week. So I I just don't want to miss that boat anymore. I would rather put $300 in the Elon bucket, and if it goes somewhere, it does, and if it doesn't, that's fine too. I would rather not miss out on any more runs. I don't care how stupid the traditional markets think they are. These are changing people's lives.

My life in particular. Thanks, Jackson. It's interesting to me that Renee owns just a little bit of Bitcoin. It reminds me of something I heard recently from Liz Young. Head of investment strategy at SoFi, which provides smartphone-friendly financial services like banking, lending, and crypto trading.

If you talk to people in the crypto space and you tell them that you're 100% invested in Bitcoin, they think that you're super risk-averse. And that's, you know, compared to all the other coins, they think Bitcoin is like the boomer coin. That's what they call it. But to me, right, somebody who's used to traditional assets, stocks, bonds, diversify in a 60/40 and then some, and using alternatives and all of that. I hear somebody say that they have a ton of their assets in Bitcoin and I'm like, oh my God, you know, are you sure? Are you sure that's the right place to be on the risk spectrum?

That raises a question I hadn't thought about before. Is Bitcoin a crypto blue chip? I think the answer to that question depends on whether you believe cryptocurrency in general should be a part, even a small part, of a mainstream asset allocation. Liz at SoFi says yes. Her view is that bonds are no longer pulling their end of the asset allocation bargain. Yields are so low that bonds can't be counted on to provide enough return to offset the risk investors take in stocks, she says. So investors should consider alternatives, and crypto is one of those alternatives. If that's your view, sticking with a basket of cryptos you feel are high quality makes sense. Now here's a different view.

You know, I think it is to some extent a cult masquerading as a currency.

That's David Kelly. He's the chief global strategist at JPMorgan Asset Management, and he's not a fan of cryptocurrency in general as a currency or an investment.

We have no way of measuring its expected return or even thinking about what its expected return is. There's no stream of income or dividends or use services coming from this. So no way of guessing that. But what we do know is it's got huge volatility. And we also know that there is no reliable correlations or cross-correlations of other assets. It's young enough, and it's crazy enough in terms of volatility, you can't tell that. So it's not a suitable portfolio asset. I can't put it into a portfolio as a portfolio manager and say, this is what it will give me in terms of reducing overall risk. Or enhancing expected return. And in fact, given the level of volatility, even a small dose of it would so raise the volatility of the overall portfolio, I'd actually be using up a lot of my risk budget just putting it in there. So as a money manager, no, I couldn't put it in a portfolio.

Now, if that's your view, either Bitcoin or Dogecoin represent a gamble, not an investment. And if you decide to gamble, you might as well choose the one that seems most capable of a sharp percentage move higher. I think there's a temptation among longtime investors to moralize about meme traders, about how what they're doing is silly and will end badly, and I sometimes do it myself. But I've considered a different possibility too. Many meme traders seem to embrace the risk they're taking. They've discovered, for now at least, a way to monetize a hidden asset: their ability as digital natives to spot chatroom trends faster than the rest of us. I suppose you can call that weird finance, but meme traders might say the same about a decade of near-zero interest rates and endless government deficits paired with partisan squabbling and six-figure college degrees that sometimes lead to low-paying jobs. My hope for meme traders is that their profits turn their thoughts to capital preservation and to finding assets whose long-term growth is a reflection of things that are more reliable than momentum, like cash flows and asset values and even dividends. There is definitely a path for crypto flippers to transition to ordinary savers. I've told a story about buying a trashy 4-cent stock in my early 20s that soared past $1 shortly before collapsing. I made a nice little profit, and it didn't lead to a lifetime of financial thrill-seeking. I've been a boring but content saver in the broad stock and bond markets for decades. I'm not tempted to flip crypto today, but to anyone who is, my advice is go ahead, but spend a little from your entertainment budget, not a lot from your investment capital. Coming up after a short break, if crypto crashes, could it pose a systemic risk to the economy or other asset classes? And what do executives at two top 10 cryptocurrencies say about their own market values and the performance of parity coins? That's next.

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Cryptocurrency is not brand new. Bitcoin is coming up on its 13th birthday. It's designed to be a payment system and store of value, whereas Ethereum, the second biggest crypto by market value, is those things and a platform for other applications like NFTs. Ethereum is 6 years old. So apart from speculators and early adopters, why haven't these coins caught on for everyday use by ordinary people? A couple of weeks ago, Jackson did an episode pointing out some shortcomings in these networks. Jackson, is it rude of me to talk about you like you're not here? Yeah, go ahead. That's just the kind of thing Jackson would say. Critics say Bitcoin and Ethereum can be restrictive and clunky and slow for everyday transactions. They also consume staggering amounts of electric power. Now, Ethereum is making some changes, and there are also younger cryptos designed to address these complaints.

"When I started Polkadot, it was really to try and boost the idea of a multi-chain future. Back in 2016, there was a lot of mindshare sitting with Ethereum and people were basically saying, 'Well, there's just going to be one winner.' There was a lot of conversation. I felt that the world was going to be a lot better if we had multiple different chains, each really well customized for doing one particular domain-specific job." That's Gavin Wood.

He's a co-founder of Ethereum and the founder of Polkadot. Polkadot, which has gained more than 500% this year in price to reach a market value of $60 billion. When Gavin talks about chains, he means blockchain, the tech foundation that cryptocurrencies are built on. Bitcoin and Ethereum have blockchains that are specific to their currencies, whereas Polkadot's blockchain is designed to work with other blockchains. I asked Gavin, what's the relationship between the usefulness of the Polkadot network and the market value of its currency? It's a difficult question and probably one best asked of the people buying the currency, not the people building it. But here's Gavin.

It's always really hard to predict the economics of these things, mostly because the technology is in such an early stage. It hasn't been deployed. It's, you know, internet in the mid-'90s. It could go all the way, it could just fizzle out. I mean, in retrospect, in hindsight, of course, it's like, yeah, well, obviously it was going to go all the way. It's a transformative technology. But it's not so easy to recognize that at the time. You know, I've dedicated 8 years of my life to this so far. It's probably going to be a few more years yet. And I do that because I do think it's a very transformative technology. It has the possibility of rewriting the rulebook on an awful lot of everyday life.

As a serious entrepreneur Gavin is, as you might imagine, not thrilled with all the attention being paid to parody crypto. He calls it exasperating.

You only have to look at the top 10 coins and see, you know, there's a joke coin and then there's a joke of a joke coin. And it's like, what's going on? And I think this does demonstrate there is a substantial amount of the market that is just given over to hype and craze. And, you know, it's very difficult to argue against that.

A cryptocurrency called Cardano has climbed even faster than Polkadot. It's up more than 1,000% this year to a recent market value of $68 billion. That means it's worth more than FedEx, the delivery network. Cardano is based on robust academic research.

A lot of thought was put into, you know, how you just don't create the new greatest thing, but how do you make it scalable, sustainable? How do you ensure that transactions could happen at a high rate? How could they happen cheaply?

That's Jeff Pollock, who had retired from a career in banking and today is the chief financial officer of Input/Output, the company behind Cardano. I asked Jeff, what's the connection between the usefulness of cryptocurrency networks and the market value investors are placing on the currency themselves?

I don't know that that connection is across all cryptocurrencies. First, I think about the value of our platform and, and what are the things that drive value. So, you know, adaptability is one of the things that drives value. As hard as it is, you take the wrong approach of doing the research, spending an inordinate amount of time, especially in the software arena or, or crypto currency world to develop a platform that you feel is going to be quick, energy efficient, cheap to use, easy to adopt, and, and sustainable over a very long period of time.

Jeff isn't a fan of parity crypto either. He says, I don't like the projects that delegitimize the legitimate projects. There's nothing silly about Cardano and Polkadot. But who's to say they're not worth twice their current values or half? If you look at a single crypto, it's difficult to know what to make of the price. But when you look at all of them, the collective value starts to look unsustainable. Liz from SoFi, who remember is open to using crypto in long-term portfolios, counts 8,800 different cryptos and says a shakeout seems likely, but that the asset class will endure.

You don't really know that you're in a bubble until after it bursts. So then we look back at it and say, oh, okay, 8,800 coins was an indication, or this many IPOs, this many SPACs, the NFTs— those were all indicators that we might have been in a bubble. There also can be bubbles in parts of a market and not blow up the whole system.

What if there was a widespread crypto crash? What would happen to the stock and bond markets?

From our perspective here at Frontline Compliance, we see that right now the crypto asset markets are still very much separate from the general markets overall. So the stock and bond market is still operating separately. I think as long as the major financial players are actually not offering their own crypto exchanges and cryptocurrency trading platforms, then we are quote unquote safe from the systemic risk.

That's Amy Lynch, a former securities regulator who founded Frontline Compliance and now advises asset managers. When she says systemic risk, she means how if the collapse of a particular asset becomes a problem for banks, it becomes a problem for all of us, and the panic can spread to just about everywhere. She doesn't see that for now. And to her point, it was striking how after the overnight collapse of that Squid Game coin, Ethereum hit a new high and the stock and bond markets paid no attention. The esoteric nature of crypto and NFTs is probably a good thing when it comes to thinking about spillover risk. Here's David from JPMorgan.

The economy is a lot less vulnerable to a crypto meltdown than it would be to a housing meltdown or a government bond meltdown because it's not really that connected to the real economy. There were two very dramatically ugly parts of the housing meltdown, for example, in 2008. One was that housing was a significant part of the economy, and then it was also tied up with all the sort of built-in edifice of risk within financial institutions on the housing market.

So is a crypto crash coming soon? I have zero ability to predict a thing like that. Pricing does look unsustainable to me, but bubbles can last for longer than you expect. Amy at Frontline says more regulation could increase adoption of crypto but also dampen some of the price speculation. And she says regulators often don't move fast enough. David at JPMorgan says higher interest rates could have a cooling effect on runaway speculation, but he also thinks that the Federal Reserve won't start raising them until the end of next year, and that it might only raise them by a point and a half or less by the end of 2023, or it might even chicken out.

That could feed these bubbles of fraud and certainly allow for some of the weirdness in finance to continue. But as a long-term investor, and I know I may be leaving some money on the table, but I'm really kind of interested in building wealth for the long run and being somewhat careful here. But I want to understand an investment. I don't mind if it takes your time to explain it to me, but I do want an investment that a reasonable person can understand. And I think that's the key here.

Thank you, Renee and David and Liz and Amy and Gavin and Jeff and The Underpants Cowboy. It's the best currency for you and me. And thank all of you for listening. Jackson Cantrell is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's @JackHough, H-O-U-G-H. See you next week.

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