Regarding… Vol 2 no 29 – Crypto is a scam

Dear Fellow Investors and Friends,

Welcome to this week’s edition of my investment letter, where I try to make sense of the world around me and share stuff that I find interesting.

I do appreciate you taking the time to read this.

Today is Thursday, August 1st, the 214th day of the year. There are 152 days left until the end of the year.

On this day in 1936, Nazi Germany held the first televised Olympics in Berlin. Hitler had been hoping to use the event to showcase his Nazi regime and his theories on racial superiority through victors by his Aryan athletes.

Enter Jesse Owens, winning 4 gold medals and setting a world record in the long jump. It didn’t stop Hitler, but at least it discredited him in the eyes of the world.

The Olympics is always good for some controversy. This year’s opening ceremony was highly polarising, as it seemed to mock some pivotal Christian events, promote transgenderism and use children in highly inappropriate contexts.

I have no idea what the organisers were thinking, but it certainly dampened my enthusiasm for the event.

Today’s letter is the third – and last – instalment of my series on Crypto and Blockchain, which has proven to be just as polarising as the opening ceremony.

Most people’s first reaction is that crypto is some scam.

So, let’s examine the most common arguments used to dismiss crypto/blockchain as a valid technology.

As I explained last week, this is a feature, not a bug. What is the intrinsic value of gold? Yet gold has maintained its purchasing power through the centuries, unlike every fiat currency you can think of – and all of those you can’t. Also, most assets are somebody else’s liability, not gold or Bitcoin. This might prove to be a helpful characteristic at some point.

Any currency with a permanent ledger open for everyone to see is probably not the best asset for criminal activities. Also, not all crooks use crypto, but all crooks use fiat money.

This is true. Imagine you bought a pizza with your Bitcoin in 2016 when it was priced at $10. That would have been the most expensive pizza ever bought at today’s price. No one in their right mind will use crypto for commercial transactions. But gold took centuries to become a stable source of value. Bitcoin is less than 20 years old. A lot of development lies ahead. And when was the last time you used a piece of gold to buy something?

Remember your 56kb dial-up internet connection? When you went to make a coffee while you waited to download all seven of your emails? The direction of travel for technology is to get better and faster at everything it does.

Have you tried drawing cash from an ATM when there is no power? Or using a credit card machine? But these are what-about arguments. If the power goes out completely, we have much bigger things to worry about than our crypto wallets’ safety.

There is a strong argument that the over-centralisation of power is causing many of the world’s problems. This centralisation enables an increasing number of kleptocrats to run countries globally. The crypto environment is based on the idea that decentralisation is a solution, and public blockchains are the enabling technology.

I would not underestimate the power of that idea.

Linux is currently one of the top three computer operating systems. Despite its many problems, Linux became so popular because users loved the ideals of the open-source movement. Interestingly, early on, experts dismissed Linux. So, I wouldn’t dismiss crypto because of its starry-eyed techno-libertarian-millennial enthusiasts.

Embrace it because of them.

Consider these quotes to show how far Bitcoin has come over the past 6 years. They are not from the most reputable person in the world, but the point stands:

“Bitcoin just shows you how much demand there is for money laundering worldwide. That’s all it is. It’s an index for money laundering.”

Larry Fink, Blackrock, Inc. Chairman and CEO; CNBC Oct 14, 2017

“I was wrong about Bitcoin. It is a legitimate financial instrument that allows you to maybe have uncorrelated types of returns. I believe it is an instrument that you invest in when you’re more frightened, though. It is an instrument when you believe countries are debasing their currency by excess deficits, and some countries are.”

Larry Fink, BlackRock, Inc Chairman and CEO; CNBC, July 15, 2024

Today, BlackRock runs the largest Bitcoin ETF.

A new technology needs a killer app to be successful. Cryptocurrencies held in ETFs are not that killer app.

The BlackRocks of the world regard it as just another asset that can be financialised and sold at scale to the public, regardless of use case or intrinsic value. If he could only scale the opportunity, Mr. Fink would probably wrap his wife and children in an ETF and sell it to the public. So, his imprimatur holds no water.

Crypto works well as a store of value in countries that debase their currencies. It also has significant functionality in countries where there are exchange controls. In the future, it is possible that we will have more, not less, countries that control and devalue their currencies.

Be that as it may, cryptocurrency’s primary purpose is to incentivise decentralised computing power to validate information held on the blockchain.

Finally, I would be cautious about the misgivings of “experts’ about the future of crypto/blockchain. Like any other forecast, they should be taken with a pinch of salt.

The Wright Brothers achieved manned flight 121 years ago. The reaction? The Engineering Magazine said, “Our scepticism is only as to the utilitarian value of any present or possible achievement of the aeroplane. We do not believe it will ever be a commercial vehicle at all.”

IBM was one of the first computer companies to operate at the cutting edge of the technology sector. Its specialty was large mainframe computers that could rapidly process numerical data. In 1943, their CEO, Thomas Watson, said, “I think there is a world market for maybe five computers.”

Nobel Prize winner in Economics Paul Krugman wrote in 1998: “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machines.”

Who knows how this technology will develop in the future? And in the absence of such certainty, what is a sensible course of action?

I don’t think it is my place to tell you what to do. I can only tell you what I am doing.

For quite a while, I have been buying a little bit of a range of different cryptocurrencies monthly. For the price of one good meal every month, I get a ringside seat to watch something develop into something special. Or not, as the case may be.

Cheap optionality.

The MWI Worldwide Flexible Fund (aka the cockroach) also has a small exposure to FRMO, which owns assets along the whole crypto value chain – from mining rigs to various forms of actual cryptocurrency.

At this point in previous letters, I would move on to interesting new highs and lows and then “what I’m watching/listening/reading”. I’ve decided to change it up a bit because:

• I’ve become bored with it.
• It has started to strike me as being pretentious.

There is nothing worse than a pretentious bore.

So, from now on, I will only have two sections: Markets and Media. This gives me the freedom to not only talk about new highs or lows but about anything that might have struck my eye. In the media section, I can now have music, podcasts, books, or whatever.

So, with that, here goes:

Both stocks are down A LOT from their highs a few years ago, and are currently hitting all-time lows:

I mention them here for two reasons. Firstly, their share prices seem inversely correlated with the number of motorbikes and scooters on the road that deliver their service. Secondly, and more importantly, the food delivery business is supposed to be Prosus/Naspers’ next big thing after Tencent. Food Delivery is 10% of Prosus’ NAV or 44%, excluding Tencent.

The market seems to be disagreeing with this strategy.

Just Eat reported recently that its topline went backwards. Delivery Hero had to make a provision for a possible antitrust violation fine. So, they’re not even playing by the rules and still can’t make a profit! These businesses do not strike me as growth assets.

My take: Historically, the profit pool created by technology has flowed mainly to the customers, not the shareholders. The food delivery business is no different.

We all know that emerging markets have not been the place to be over the past 15 years. But for a while, China bucked the trend. It performed spectacularly well, even as most other EMs suffered.

China was different. It was big, it was growing, and it was exciting. The country’s massive middle class and rise as a global innovation leader presented potentially lucrative investment opportunities. Or so the fund promoters said.

Just in time for it to show its true colours, starting with how they dealt with the Covid issue.

China held its third plenum last week. This major meeting, held roughly once every five years, maps out the general direction of the country’s long-term social and economic policies.

BCA research summarised proceedings: “Xi doesn’t care about shareholders. In addition to fostering long-run productivity growth and breaking the economy’s addiction to leverage, they see policy aiming to shift surplus away from producers to consumers. That would be good for Chinese citizens but lousy for foreign equity investors. The Plenum confirmed… that Beijing is more interested in containing social and economic instability than in promoting near-term growth.”

The market agrees with BCA:

In addition to these issues, in many companies, ownership vests through a variable interest entity, which is simply a contract that gives you a financial interest in the business’s cashflows but not ownership.

My take: These things have historically kept me from investing in China or entities domiciled in China. This has been one of my strong beliefs, weakly held, over the past decade. But I drive my wife Amanda crazy when I change my beliefs, which happens when the facts change. However, I’m not sure the facts have changed here yet.

The maker of upmarket yoga and activewear is facing challenging times.

In yoga, this is what is called the downward dog pose:

This is the share price of Lululemon in a strikingly similar pose:

Apparel retail is a tricky business – consumer tastes ebb and flow. Lululemon rode the crest of a wave for a long time with high-quality goods selling at a premium price. And, with the advent of Covid and “work from home”, sales of “Athleisure” clothing boomed. Lululemon was a big beneficiary.

But it seems tastes are moving away from athleisure at the margin. Lululemon’s success has also led to increasing competition, with Lululemon’s premium pricing providing a wide umbrella for upstarts.

My take: I stopped buying Lululemon gym kit a few years ago, as it had become too expensive. I recently walked into a Vuori shop, which had opened right opposite a Lululemon. In it, I found better kit at a lower price point.

Keep holding the pose, class.

Since the election, South African small and mid-caps have done very well. Southern Sun Hotels (SSU), a subsidiary of investment company HCI, is one of those. During the depths of the Covid panic, it traded at just over R1 per share. This week, it reached a new all-time high of R6,00 per share:

As is common amongst HCI’s subsidiaries, SSU is a well-run business. Its CEO is probably one of the top hoteliers in the country, and its hotel rooms are skewed towards the Western Cape. Many property owners who rent out their properties don’t look after them properly, but SSU is an exception. Their hotels are always in good nick, which helps with both pricing power and occupancies.

My take: SSU is an excellent way to capitalise on the attractiveness of the well-governed Western Cape as a tourist destination. At a P/E of 10, it is not expensive. The MWI Value fund has a large holding in its parent company, HCI.

South Africa’s biggest and best-run bank hit a new all-time high this week after moving broadly sideways for almost 6 years:

I wrote about FirstRand in my very first letter last year in August, and again two months ago.

My take: New highs are bullish, especially if they occur in significant volume, as in the chart above. Overall, I get the sense that the stocks in the “SA Inc.” part of the JSE are poised for a proper run. FirstRand is a top holding in the MWI Value fund.

It’s always worth reading and considering views that are the opposite of your own.

Here is one written by Stephen Diehl.

Stephen Diehl is a software engineer and a vocal critic of the cryptocurrency industry. He consistently writes critical pieces on everything related to crypto in his blog.

Unfortunately, in this article from 2023, the last one he published on his blog, Stephen doesn’t make any substantive arguments. He dismisses crypto without even considering its relationship with blockchain. Then, he goes on to build a couple of straw man arguments for it, which he, of course, easily destroys.

My take: You can dip into his articles and make up your own mind.

The first time gold medals were presented was in the 1904 games. Before that, winners were presented with silver medals.

Medals have changed from this:

To this:

However, none contained much gold; since 1904, they have been made almost entirely from silver, with around 6% of gold used as plating.

This year’s medals are slightly different in that they contain some metal from the Eiffel Tower. Overall, the value of the metal in the medal is estimated to be $920.

Here’s an interesting article giving more background about this year’s medals.

My take: It doesn’t matter what the value of the metal is in the medal. For the athletes, winning one is the culmination of a lifetime of effort and dedication. For that, it’s invaluable.

Radiohead is a seminal band. Their impact on the music world is up there with the Beatles, Dylan, Led Zeppelin, Talking Heads, and Bowie. Many believe their album OK, Computer was one of the best rock albums ever. It addressed themes of alienation, technology, and modern life. As such, it is just as relevant today as it was 27 years ago when it was released. The band was also instrumental in progressing music from grunge to something much more nuanced.

But OK, Computer wasn’t peak Radiohead. That came in 2007 with their album In Rainbows. The album blended different genres of music into something completely new. Complex rhythms, surrounded by layers of guitar, created a dense sound but with an interesting sense of space.

The first time I heard it, I thought, “What was that!” But after a few listens, I realised this was something refreshingly different.

Here is Radiohead playing “In Rainbows” live from the Basement in April 2008:

Enjoy!

Please don’t hesitate to let me know if you like the new way of presenting the letter and, even more importantly, if you don’t!

And remember to be careful out there.

Piet Viljoen
RECM