Money Stuff

Good Luck Spending Your KodakCoins

Also blockchain-hype day-trading, hedge funds, dividend futures and bathrooms.

Please take my KODAKCoin away.

Hey this is sort of cool: Eastman Kodak Co. is planning to set up an online database for image rights management, run a platform to allow photographers to license their work -- like a Spotify for photos (or like a Getty Images for photos?) -- and then trawl the internet to find and stop unlicensed uses of those photographs. That seems like a useful business for a post-film photography company to get into. Good work Kodak oh no oh no oh no what is this:

Today Kodak and WENN Digital, in a licensing partnership, announced the launch of the KODAKOne image rights management platform and KODAKCoin, a photo-centric cryptocurrency to empower photographers and agencies to take greater control in image rights management.

Utilizing blockchain technology, the KODAKOne platform will create an encrypted, digital ledger of rights ownership for photographers to register both new and archive work that they can then license within the platform. 

Oh no.

“For many in the tech industry, ‘blockchain’ and ‘cryptocurrency’ are hot buzzwords, but for photographers who’ve long struggled to assert control over their work and how it’s used, these buzzwords are the keys to solving what felt like an unsolvable problem,” said Kodak CEO Jeff Clarke. 

Ohhhhh no. Look: Kodak wants to run a web crawler and a central database of photographs. You don't need to do that on the blockchain. It also wants to run a marketplace to match buyers and sellers of photographs. Again you don't need to do that on the blockchain. You certainly don't need your own currency to do that; lots of markets -- the stock market, the supermarket, the existing market for photographic licensing -- run on dollars, and what is convenient about dollars is that if you get dollars for licensing your photographs you can spend them at the supermarket.

Kodak Joins Cryptocurrency Craze With New Cyber Coin

But here is the best part of Kodak's announcement:

The initial coin offering will open on January 31, 2018 and is open to accredited investors from the U.S., UK, Canada and other select countries. For more information visit www.kodakcoin.com. This initial Coin Offering is issued under SEC guidelines as a security token under Regulation 506 (c) as an exempt offering.

Kodak, unlike many cryptocurrency newbies, is a real company, albeit one that is somewhat reduced from its glory days. It is real enough to have real lawyers, anyway, so it has to do the initial coin offering of KodakCoin legally. And by now everyone accepts that speculative initial coin offerings -- particularly ICOs of tokens for use on not-yet-existing platforms -- are securities, and so have to be either registered with the Securities and Exchange Commission or issued under an exemption from registration. Kodak has sensibly decided to do an exempt ICO using a 506(c) private placement, which means that all purchasers of KodakCoins must be accredited investors, generally requiring either $200,000 in income or $1 million of net worth. 

Which means ... that you can't use it? Want to buy some KodakCoins to pay for photos on the KodakOne platform? Great, fine, if you're a millionaire or a company, but middle-class individuals will not be able to buy KodakCoins. 

Want to give those KodakCoins to a photographer in exchange for her photographs? Actually there is a plausible belief "that a holder of an unregistered token generally can freely use the token to engage in commercial transactions on the related platform," meaning that you can pay for photographs with KodakCoins even if the photographer is not an accredited investor, though the law is not necessarily clear on this point.

But what if the photographer sells her photos for KodakCoins and then wants to sell her KodakCoins for money? Well, she will have a hard time. "You should not expect to be able to easily and quickly resell your restricted securities," warns the SEC about private-placement securities like KodakCoins. "In fact, you should expect to hold the securities indefinitely." That perhaps overstates things slightly: The photographer is probably allowed to sell her KodakCoins to accredited investors, and for all we know perhaps Kodak will set up (or find) a securities exchange limited to accredited investors who are willing to exchange photographers' KodakCoins for cash. (A Kodak spokesman did not reply to my inquiry about this.) That seems quite complicated for Kodak, but also for the photographers. Why would a photographer want to receive payment for her work in the form of a restricted security that she can't easily sell, instead of in the form of, you know, dollars?

This is a weird but important problem for token platforms to figure out, shortly after they figure out the even more important problem of how to get their platforms running. If speculative ICOs for not-currently-useful tokens on not-currently-operating platforms are securities offerings, then there are restrictions on who can buy and sell tokens and how. But if those platforms are going to get up and running, and if the tokens are going to be useful in buying photographs or file storage or whatever, then those restrictions have to go away. Law firms have written memos about the uncertainties here, and people in the cryptocurrency community have put a lot of thought into this. We have talked about the Simple Agreement for Future Tokens, which aims to be a security to fund building a platform but to flip into a non-security utility token once the platform is running. 

But these are hard problems that are only worth worrying about if you are actually trying to build a useful platform. Not everyone is! You can read KodakCoin's website, which makes lots of vague claims but doesn't actually explain how anything will work. ("Our marketplace enables coin holders to buy, sell and book products and services such as flights, hotels, models, venues and studios with their coins," it says, but there is no discussion of the securities-law implications of any of that, and no list of airlines that have agreed to accept KodakCoin.) This does not strike me as fully baked, or half-baked, or really anything other than a collection of buzzwords prefaced by a frank admission that it is a collection of buzzwords. Obviously the stock was up 119 percent on the announcement. 

Elsewhere in crypto.

Why do people keep falling for this stuff? Here is Bloomberg's Brandon Kochkodin with the answer, which is that they expect other people to fall for it even harder:

Turns out, some experienced day-traders are trying to ride the surge of buying that invariably follows companies that suddenly reinvent themselves as blockchain ventures. That’s enough, market watchers say, to bring in high-frequency traders and computer algos.

And to these players, what really matters isn’t so much that crypto is real, but that the share-price moves -- and the quick profits -- are.

“The interest in these stocks is so strong because many traders like me are so hungry for the increased volatility,” said Jim DePorre, a professional day trader and founder of sharkinvesting.com. “I know that there are still traders willing to jump in, so who cares if the stock has questionable value?”

You see this in old-school pump-and-dump schemes too: The subscribers to Slick Steve's Penny-Stock Touts Newsletter don't necessarily think that Slick Steve has any great insight into biotechnology or whatever, but they know that when Slick Steve pumps a stock it goes up, and they want to know what stock he is pumping so that they can get in on the early side of its rise. For all I know there is no one who really believes in the pump-and-dump: There are just people who get in early and profit, and others who get in late and lose money and resolve to be faster next time. 

It is in some ways a pure distillation of stock-market speculation. The way you make money on stocks is by selling them to someone for more than you paid for them, and while that traditionally involves trying to figure out what they are worth, based on the discounted cash flows or whatever, that is not an absolute requirement. We could all just agree that we don't care what the cash flows are worth but want to trade the stock anyway. I wrote last month:

Presumably all of those people are buying because they expect to find bigger rubes to sell to. The "Silly Company Becomes Silly Blockchain Company" thing has become a self-referential meme; everyone knows that everyone is buying because they expect everyone else to buy. Is it a metaphor for cryptocurrency more broadly? 

Bitcoin, after all, is itself a distillation of speculation: It has no intrinsic value, but people buy and sell it because they have collectively agreed that it has value. It is "a Keynesian beauty contest where all the pictures are blank," I said once. There's something a bit like that in blockchain stock mania too.

Meanwhile Jamie Dimon is sorry that he called bitcoin a "fraud":

“I regret making” those comments, Dimon said in an interview with the Fox Business network. “The blockchain is real. You can have crypto yen and dollars and stuff like that.”

That manages to sound even more dismissive than the "fraud" comments, but I like "the blockchain is real." I hope he got to touch the blockchain. And Mike Novogratz is all in on convoluted crypto stuff:

Mike Novogratz, the Wall Street trader who became one of bitcoin’s most outspoken champions, is starting a merchant bank dedicated to cryptocurrencies and blockchain-based ventures. And he intends to take it public. ...

Under the plan announced Tuesday, Galaxy will as a first step buy Canadian crypto startup First Coin Capital Corp. It then will merge with a Canadian shell company, Bradmer Pharmaceuticals Inc., through a reverse takeover and use that entity to raise C$250 million ($201 million) in a private placement of stock next month. Bradmer, to be renamed Galaxy Digital Holdings, will own an interest in the merchant bank and be listed on the TSX exchange.

And: "Chinese regulators move to shutter bitcoin mines." "Bitcoin Can Drop 50% and China Miners Will Still Make Money."

Hedge funds.

Congrats everyone, hedge funds are good now:

Figures tallied by HFR, the research group, this week show that hedge funds across all strategies produced returns of 8.5 per cent in 2017, better than the 5.4 per cent recorded in 2016. Equities hedge funds — which include long-short funds, growth and value funds and sector-specific strategies — were up 13.2 per cent, their best showing in four years. 

Advisers say it is too early to be sure this return to form will assuage investors’ concerns about high fees and mediocre long-term profits. But a cautious optimism has returned to the industry after the outflows of 2016 — the worst year for flows since the financial crisis — and many managers posted robust, or even eye-poppingly good, returns.

John Paulson's Enhanced fund, however, is still bad:

One of John Paulson’s hedge funds has plunged about 70 percent over the past four years, marking a dire stretch for the billionaire plagued with investor redemptions.

The Paulson Partners Enhanced fund, which uses borrowed money to double down on its trades, sank 35 percent last year and about 49 percent in 2016, according to a person familiar with the matter. That caps a four-year money-losing run for the fund, which follows a merger arbitrage strategy on which Paulson founded his firm.

Look I do not want to give you investing advice but let's talk for a minute about hedge-fund names. A good rule of thumb is: Greek myths, not adjectives, and specifically not performance-related adjectives. Don't call your fund "Enhanced," because it will inevitably end up performing worse than the non-Enhanced fund. Don't call your fund "Conservative," because you will inevitably lose it all at the roulette tables. That is Hubris and Nemesis for you; the Greeks knew all about this.

Speaking of Hubris and Nemesis, what's Steve Cohen up to?

Steve Cohen had about $90 billion of market bets outstanding at the beginning of this year, indicating his Point72 Asset Management was using large amounts of leverage as the firm prepared for outside investors.

The firm’s regulatory assets, a calculation required by the Securities and Exchange Commission, reflect as much as $8 of leverage for each dollar of capital, according to documents filed Jan. 6 with the agency. That is more than double the leverage Cohen reported using at his previous hedge fund firm, SAC Capital Advisors, at the end of 2013.

I have to say that I am rooting for him. I hope he returns 50 percent a year for the next decade, with the cleanest and most comprehensive compliance program you can imagine. Partly because it would be funny but also there is just not enough magic in the world. Star hedge fund managers have a good year and then some bad years, markets are mostly efficient, long-term risk-adjusted net-of-fees outperformance is elusive. It's easy and boring to explain SAC Capital's consistently strong performance by pointing to the fact that it did rather a lot of insider trading, but that is not a satisfying explanation. If the reborn Point72 shoots the lights out and stays squeaky clean -- if its performance comes from idiosyncratic skill rather than luck or cheating -- then that will just make the world a bit more interesting.

Dividend futures.

Here is a fascinating post from Matt Klein about the fact that dividend futures on European stocks imply "a Depression-level collapse in European dividends." The reason for that is not because futures traders expect European stock dividends to collapse. Rather, it seems to be because dividend futures are a byproduct of European banks' production of structured equity products. A structured product generally pays customers some amount based on the price changes of some stock; banks hedge the product by buying the underlying stock. But the product's formula only considers the price changes, not the dividends, meaning that owning a whole stock (with dividends) is not a perfect hedge to selling a structured product (without them). So the banks started selling dividend futures to complete their hedging. Klein:

European dealers have a large structural short position in both dividend futures and swaps in order to hedge the structured notes they have sold. Their need to hedge means they are relatively indifferent to the actual pricing of dividend futures.

This makes issuers of structured notes similar to commodity producers: both have a greater need to hedge than the people to whom they are offloading risk. General Mills is exposed to grain prices, but its farmers are far more exposed. This asymmetry creates opportunities for those taking the other side of the trade.

The banks built a machine that took stocks, disassembled them, and turned one part of them -- their price moves -- into a product that could be sold at a premium. But this left a residue, a waste product: The banks had bought the whole stock but only used the price moves. They couldn't use the leftover dividends themselves (for capital and risk reasons), so they sold them for scrap. And there was more supply of the scrap dividends -- that is, more demand for the premium price-moves-only product -- than there was demand for them (because buying a dividend future is a bit of a weird thing to do), so you can get them cheap. 

This is a widespread opportunity that you see in, for instance, capital-relief trades. Banks run giant factories that turn bits of paper into different bits of paper. Sometimes those factory processes create scrap paper that the banks don't want. If you can teach yourself to love the banks' waste products, it can be a good business. 

Bathroom Stuff.

Sure

At an opening press event for CES Sunday, Kohler debuted a voice-enabled lighted mirror with dual-microphones and Amazon.com Inc.’s virtual assistant Alexa built in. Set to launch in March, it will allow people to control the mirror’s lighting, start showers, adjust water temperature and spray functionality, even cue up music, with just their voice. Kohler is also planning to eventually incorporate the Alphabet Inc.’s Google Assistant.

The downside is that you are allowing Amazon and Google to spy on you in the shower. The upside is: No more tedious need to start your shower by turning a handle like a chump. Is there any extremely minor problem that modern technology can't solve with constant surveillance of our most private moments?

Elsewhere: "Wag Labs Inc., the startup behind a popular dog-walking smartphone app, inadvertently exposed webpages showing customer information including addresses and lockbox codes that could have enabled thieves to break into homes."

Things happen.

China May Halt Purchases of U.S. Treasuries. Switzerland’s Central Bank Made $55 Billion Last Year—More Than Apple. Here’s What to Watch When Wall Street Banks Report 2017 Results. What the Tax Law Will Do to Bank Earnings. Two of Buffett’s Successor Candidates Join Berkshire’s Board. Mifid II setback: regulator halts European equity trading shake-up. Brussels warns UK companies of shut-out in event of no-deal Brexit. The World’s Best Female Poker Player Joins the World’s Biggest Hedge Fund. Deutsche Bank Ties May Spur Recusals by New U.S. Attorneys. The “Quiet Life” Hypothesis Is Real: Managers Will Put Off Hard Decisions If They Can. Why Trump's going to Davos. "Pale white robot strippers with CCTV cameras for heads gyrated around poles to Justin Timberlake at a Consumer Electronics Show-related party at a Las Vegas strip club on Monday night." Man caught with 'full rack of ribs' in his pants, police say.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Matt Levine at mlevine51@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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