Thursday links: Investing, revenue meta, DATs, prediction markets

Fundamentals vs. flows

The crypto investor Jon Charbonneau explains that crypto investing is just investing.

Whatever the asset class, he argues, there are only two basic ways to approach investing: forecasting fundamentals or predicting flows.

Fundamental investors form beliefs about future cash flows: “The whole point of fundamental investing is that you don’t need other people to agree with you” (aka the Warren Buffett way).

Flow investors form beliefs about future trading flows: “You’re just hoping someone else will buy it from you at an even higher multiple” (aka the greater fool theory).

These are familiar concepts, but it’s helpful to see them framed so thoughtfully in the context of crypto.

Either approach can work, Charbonneau says, but things get muddled if you don’t know which one you’re taking.

For example, is ETH a fundamental investment or a flows one? 

It seems to be a little of both, which makes the investment case more complex: “It requires taking more leaps of faith around human behavior and market psychology.”

That sounds difficult. 

The simplicity of Bitcoin’s flows-based investment thesis, by contrast, has been so successful that it “can straddle the line of ‘fundamental investing’ and ‘greater fool investing’ depending on how you quantify monetary utility.”

I personally think “monetary utility” is mostly fake news, but I also think bitcoin has probably hit escape velocity and can now be considered a fundamental investment, like gold. 

Crypto investing more generally may be at a similar inflection point. 

“Historically, it has paid off to be primarily flows-driven as a crypto investor,” Charbonneau notes. “Looking forward though, I believe that focusing more on fundamentals…could finally produce more alpha as the industry matures.”

That would be good news because, as Charbonneau adds, “narrative trading” is a zero-sum game (I’d call it negative sum), while “allocating capital to projects capable of generating cashflows can be a positive-sum game.” 

Charbonneau highlights digital asset treasury companies as flows-based investments, so it’s perhaps ironic that they’re catching on with TradFi investors at the same time that fundamentals are catching on in crypto.

“Crypto investing is becoming relatively more fundamentals-driven,” he says, while “TradFi investing is becoming relatively more flows-driven.”

“Someday they’ll converge, and we’ll just be talking about investing.”

Let’s hope they meet somewhere on the fundamentals side of center.

Rethinking the value game

To Charbonneau’s take on fundamental investing, I would add that people who think they are investing on fundamentals are often investing on flows. 

Last year, David Einhorn declared that “markets are fundamentally broken,” because his standard playbook of buying a stock at, say, 10x earnings and then selling it at 15x earnings was no longer working.

“The competitors have effectively left the field,” he explained.

That sounds like good news — it’s always good to have less competition, right?

But fewer competitors gave Einhorn fewer opportunities to play his preferred game of “anticipating the anticipations of others.” 

So he was forced to find a new game: “We can’t count on other long-only investors to buy our things after us,” he explained. “We’re going to have to get paid by the company.”

Charbonneau and Buffett would approve.

The revenue meta

Luca Netz is also hopeful that crypto investing will become more fundamentals-driven: “The days of no revenue being worth billions of dollars has to be over,” he told Laura Shin. “I think this is going to be the era of result-driven success and less speculative success.”

This, he says, will help crypto build “disruptive technologies that change the world” and not just “pseudo-disruptive technologies that you tell a story around.”

Let’s hope so.

Note: Netz runs a cartoon-penguin business based on an NFT collection and an affiliated memecoin.

Chanos is winning

MSTR is down 21% over the past month, vs. bitcoin down just 2.5%.

That has taken MSTR’s all-important “mNAV” metric to just 1.34x (i.e., the stock is worth 34% more than the bitcoin it holds).

The falling mNAV represents a profit for short-seller Jim Chanos and a problem for Michael Saylor.

Saylor has said that Chanos doesn’t understand Strategy’s business model, but his decision to continue selling stock at current levels seems like a tacit admission that the investment case for MSTR remains circularly dependent on the premium investors are willing to pay for it.

I’m not sure how investors should think about this.

The Ethereum DAT BTCS, for example, now trades at 0.65x NAV — does that make it a better or worse investment than, say, the Ethereum DAT BMNR at 1.35x NAV?

You usually want to pay as little for a stock as possible, but if the value of that stock is a function of people paying more for it, maybe you want to pay more?

I really don’t know. But falling multiples are certainly not good for existing shareholders.

Metaplanet (the Japanese version of Strategy) now trades on 1.95x NAV, down from 8x just two months ago.

What’s the math on breaking even if you bought the stock at 8x NAV and you’re getting diluted by new sales at 1.95x?

Flows-based investing is hard.

The case against prediction markets

Trader-philosopher Agustin Lebron says prediction markets are 1) bad at being markets and 2) bad for society.

They fail as markets, he explains, because every participant is trying to do the same thing: to make money trading.

This is different from financial markets, which work because “different participants have different risk preferences.” 

Differing preferences means that both sides of a trade can benefit — like an airline buying a futures contract from an oil company, for example.

In prediction markets, where the buyer and seller have the same motivation, trades are zero-sum (just like the flows-based investing).

Supporters of prediction markets say they provide a service by giving people better information. 

But Lebron (who, no, does not play for the Lakers) argues that “most or all of the supposed value of [prediction markets] for hedging evaporates under closer inspection.”

In short, he argues there’s no risk that can be effectively hedged by betting on something like a presidential election.

And since there’s no benefit from hedging, “prediction markets only work when there is a steady supply of dumb money.”

Casinos, sports betting and memecoins have proved there is a steady supply of dumb money, so I’d note that prediction markets might well be a successful market. 

Lebron hopes they don’t, though, because “the very existence of the prediction market influences and hence distorts the underlying event that’s being predicted.”

He cites the example of someone who claims to have bet on Zoran Mamdani to win the New York City mayoral race and then funded Mamdani’s campaign to win the bet. 

I’m not sure how likely or repeatable that is, but it illustrates the feedback loops that might amplify the kind of chaotic events that people like to bet on.

As a result, Lebron warns that, if prediction markets get big enough, “they might just kill our society.”

Let’s hope everyone does some fundamental investing instead.

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