Stocks

Even Cynics Can Love Crypto

There are no true believers in pump-and-dump; only those who get in early and profit.

Why do people keep falling for this stuff?

Photographer: Daniel Acker
This post originally appeared in Money Stuff.

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.

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

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    Matt Levine at mlevine51@bloomberg.net

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