Pulse of the Market - April 2022
Everyone has an opinion on NFTs but can't explain what a smart contract is. The two topics: The future of NFTs and how "smart money" isn't really that smart.
The Future of NFTs: The Commercialization of Collecting, Trading, and Authenticating Digital/ Consumer Goods and In-Person Experiences
The internet was one of the greatest inventions human kind will ever come up with for several reasons. For one, it allowed for mass dissemination of information, the ability to communicate with anyone at any time, and the ability to collaborate more efficiently than ever before.
The problem with our current internet, digital ecosystem is that the internet is controlled by an a handful of companies and creators in this ecosystem are not able to truly capture the value they create whether that is through art, music, social commerce, or consumer goods.
This all changes with the use of smart contracts and NFT’s. You must understand the use case of smart contracts imbedded in NFTs to see the use case of this ground breaking technology.
What is a Smart Contract
For a basic definition, smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.
For example, Kanye West makes all his concert tickets NFTs, each with a smart contract built in and a rarity assigned. The smart contracts gives Kanye a royalty of 10% of each secondary sale in perpetuity while the NFT holder gets access to exclusive merchandise, a sneak peak of his next song, an exclusive concert (aka endless possibilities) if they hold the NFT. Furthermore, the smart contract allows Kanye to add whatever benefits in the future he wants providing a future growth component to holding the NFT.
Do you see how this strips the power from the record label, central entity and provides the value of the creator’s work to the ACTUAL CREATOR?
This is just one example of music and record labels being completely disrupted by this technology. Many believe other parts of the current economy such as vast amount of fake consumer goods, sporting events/music tickets, art, and how creators (sports, social media, even working professionals) will be compensated could be completely changed.
If you think I am crazy and “this will never happen” well it already has. Snoop Dogg released a mixtape via NFT using $APE coin only for purchase, which is the Bored Ape Yacht Club Utility token. In the link, you can actually listen to all 4 songs, you just don’t “own them” unless you buy the NFT version.
If you are dismissing this technology because you saw some guy on CNBC call it a Ponzi (that term is so overused and misunderstood by the way) and pointed to a monkey picture, I am sure you read these types of opinions below in the 1990s without coming to a logical conclusion yourself. Trading NFTs is not a Ponzi as a Ponzi pays investors with proceeds from new investors. A bubble? Absolutely, but Ponzi is the completely wrong adjective to use.
*And no, I am not advocating for yolo’ing into monkey pictures with your life savings*
Why the “Smart Money” Narrative is a Lie
Everyday, someone on CNBC declares themselves “smart money” given they run a business around managing others fortunes. However, if you actually look at the most recent data, and data over the last several decades, “smart money” really isn’t that smart.
*Just so we are all on the same page, the S&P 500, which is the passive benchmark of the equity markets, returned 26.89% in 2021. While this is very high and highly unusual, ONLY 3 “smart money” funds out of the almost 4,000 hedge funds, beat the index.*
For fun, Google the top hedge fund in 2021 then scroll down to the bottom and Google the worst performer and figure out what they had in common.
The real smart money is venture capitalists, or those who provide seed, or early stage capital for private businesses. VCs have to vet out founders, understand the business, and project the company’s future growth, likely with a business that never has been proven as a sustainable business model. The even “smarter money” in VC are the crypto venture funds that are maneuvering a whole new frontier of technology.
Hedge funds, on the other hand, take on enormous leverage, buy companies that you and I can buy at the swipe of a button, and use trading algorithms to make their decisions.
Why hedge funds aren’t smart
Using algorithms, trading volatility, using derivatives, total return swaps, that amplify their bets like crazy isn’t smart, it’s outright reckless.
There’s nothing smart about applying so much pressure, through call options or shorting an entire float of a stock, that you can force the price to go up or down with rapid swings then quickly maneuver your way out of the trade.
The real smart money in the public market is the activist investor who devises real strategy to turn around a business and brings real change to the underlying fundamentals of the company.
If you want to learn about the most famous activist investor, Carl Icahn, here is a great documentary:
How the Mighty Have Fallen
Bill Hwang, our favorite degenerate 20x leveraged trader, got convicted of fraud a little over a year after he blew up his entire 20B plus fund in days.
Bill Hwang, Archegos Founder, Charged with Fraud
If you don’t remember, he was using total return swaps with several prime brokers to buy (and short) massive amounts of stock until his house of cards fell (Credit Suisse admitted this several months ago). I wouldn’t be surprised in the next several months Bill starts to talk about all his fraudulent tricks and who else on the Street does the same thing….. (a lot of others use total return swaps to hide positions off their 13F SEC report).
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