Investing Squid pro quo

Last Tuesday SQUID – a cryptocurrency based on the Netflix series Squid Game – launched with a price of $0.01. Over the course of a few days, it rose many thousands of percent to more than $2,860 by yesterday morning. Specifically, in under one week, it rose more than 230,000% to $2,861.80 as of Monday morning.

Sounds cool! What a ride to be on! If you had put $100 in this coin when it launched you’d be really rich by now. Ah, but there is a sting in this tale: out of nowhere and even quicker than it rose it abruptly crashed to 0, or $0.003161, to be precise. The website for the cryptocurrency is now offline and it looks like a classic ‘rug pull’ - a scam that sees developers abandon a crypto project with investors’ cash. Although touting an official-sounding ‘whitepaper’, there were a couple of clues that should have made it obvious it was a scam. Aside from the very dodgy-looking website and no affiliation with Netflix, plus a made-up endorsement from Elon Musk, the fact you were unable to sell tokens you had purchased from the company was a pretty major sign that something was amiss. If you can’t sell it, it ain’t a market, lads, even if it’s wrapped up in clever-sounding language such as ‘innovative anti-dump mechanism’ (seriously?). The white paper explained that buying released “selling credits,” (again, seriously?) but if there were no more selling credit left “in the pool,” you wouldn’t be able to sell. So maybe it wasn’t a scam, just really badly designed. It looks, feels, and smells like a scam but whatever, lots of people will have lost lots of money hoping this ‘Memecoin’ would deliver mega returns. Over $3m, it’s thought. A case of frenzied hot money flows looking for any kind of home. In this case, it looks like a scam, but it could have been dumped for any other kind of reason – once the selling starts on this sort of mania-fuelled asset it’s hard to stop it.

Lots of people invest in things they don’t really understand. They might know a bit, or a lot, or nothing at all. This is the case with most stocks and most retail investors. It’s generally a good idea to at least know a little about what you are putting your money into. And generally, a bad idea to invest in something we know nothing about but have heard good things about. Most of us understand that Diageo manufactures alcoholic drinks and markets and sells them around the world. IAG flies people in airplanes. These are two pretty simple businesses, easy to get, even if few could tell you about the complex manufacturing processes and supply chains that deliver your glass of Johnnie Walker at 25,000 feet over the Gulf of Mexico. Not all companies are easy – in a loose sense – to understand. But most are usually pretty clear about what they do and why they want money.

In the crypto space, that just isn’t the case at all. Few people can really explain or define what cryptocurrencies are, nor why one token should be worth more than the next. I say a few people since I’m guessing that while there are thousands or even millions of people who do know what it’s all about (or think they do), there are several times as many people who don’t but are still invested in some form of crypto. All of which makes it way easier to scam people. There have been countless numbers of crypto scams over the last few years as the space boomed. Being a discerning crypto investor is tricky – how do you know if one coin is a scam or not. Dogecoin was created as a joke and is now worth $35bn, or three times more than Rolls-Royce.

And it’s not just that people don’t really get what it is they are investing in, like, intrinsically ‘get’ what it is. I mean I can invest in shares in a company I know nothing about, for instance – just as an example - Upstart Holdings. Who cares what they do? They are absolutely roofing, and I heard some guy on CNBC in a suit talking about them so what the hell, I’ll go in on that. I may not know they do some kind of lending to people who probably shouldn’t be borrowing money (a sure way to make money), but I do know what I get when I buy shares in a publicly listed company. I get a percentage of the company and draw on future cash flow. With crypto sometimes it’s not that easy to work out what you are buying – is it a currency, part of a network, play-to-earn tokens, etc etc.

And when a company goes public there are registration documents, audits, and accounts to file. There is a lot of infrastructures to make it straightforward for investors to decide whether to put money in. With crypto, it seems that an error-strewn website and dodgy white paper is all it takes. More regulation is coming, but there will always be gaps – it’s supposed to be decentralized, after all. The crypto space is nowhere near as evolved and is kind of meant to not have the infrastructure – it’s decentralized bro. So when a new coin comes along there’s just not the infrastructure for investors to decide whether it’s all OK or not.

And even if you do think that you’re onto a winner, then are other ways in which you might find it hard to know what you are investing in. Bloomberg notes that a search for “Floki” on CoinGecko produced Floki Inu, Floki Musk, Shiba Floki, Baby Moon Floki, FlokiSwap, and FlokiMooni”.

SQUID is small fry, but it tells you a lot about what is going on in crypto land – it’s still the Wild West, as the SEC’s Gary Gensler put it. The fact is that fake/dodgy coins can moon and become worth a lot more than actual, serious DeFi projects built on years of proper research, which is kind of crazy. Who’s next? Some point to something like Shiba Inu, the self-declared Doge killer had a tremendous October, rising over 700% for the month. Memecoins are now a problem. And even if it’s not a scam, we all know any crypto can fall just as quickly as it will rise.

Markets

Stocks are mixed in early on Tuesday in Europe amid a batch of earnings reports and after fresh records on Wall Street. The FTSE 100 peeled back from yesterday’s post-pandemic peak, with a drop of about 0.5% at the start of the session as BP and Shell fell more than 1% despite a rise in profits at the former and higher oil prices. EU markets are a tad firmer. Flattish in FX at the moment, with the dollar index unmoved on the day at its 20-day SMA at 93.90. Oil is higher with WTI north of $84 after reports showed OPEC didn’t increase output as much as it could have last month. The cartel meets with allies later this week, API inventories are due later today. Gold is close to $1,800, while bond yields remain fairly static ahead of key central bank meetings. The focus is very much on the Fed meeting, which kicks off today, followed by the Bank of England announcement on Thursday.

Ahead of these the Reserve Bank of Australia (RBA) bowed to market pressure and abandoned its policy of yield curve control. The central bank said it will not try to maintain the yield on its 3yr paper at 0.1% after last week’s blowout in the bond market left the policy in tatters. It will continue to buy bonds at a rate of A$4bn a week at least through to Feb 2022 and left the cash rate on hold at 0.1%. It looks like the RBA is happy to let markets believe it will raise rates a tad sooner than the previous target of 2024, but it’s also keen to stress that ditching YCC does not mean a rate hike is imminent – perhaps late 2022 at the soonest, though it could be made to do so sooner than that.

Finally, the US manufacturing PMIs pointed to slowing growth, continued supply chain disruption, rising costs for raw materials, and manufacturing raising output prices. The UK manufacturing PMI ticked higher but still pointed to similar pressures.