Thursday links: Points, pancakes, DATs and merger arb
Airlines defend their rewards moat, Binance courts favor over breakfast, DAT fees pile up and systematic thinking
Artwork by Crystal Le
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“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”
— John Bogle
Could stablecoins kill the airlines?
The Economist writes that the four biggest US airlines would all have made a loss last year if not for their side hustle selling loyalty points.
Delta, for example, made an operating profit of $6 billion on the year, $7 billion of which came from selling loyalty points to credit card companies.
Incredibly, Delta says 1% of America’s GDP is spent through its co-branded cards.
In total, US consumers paid $187 billion in credit card interchange fees last year, which always seems ripe for disruption.
But The Economist points out that roughly three-quarters of interchange fees are returned to customers as rewards or rebates.
People love their rewards, especially the airline rewards that make travel feel like it’s free.
This could be a defensive moat for the credit card companies that stablecoin issuers are hoping to disrupt.
Understandably, the airlines would like the card companies to maintain that moat — so much so that they lobbied against an amendment to the GENIUS Act that would have lowered interchange fees.
In a letter to Congress, the airline industry warned that the legislation would “lead to significantly fewer passengers and flights.”
The amendment was dropped, but if stablecoins really catch on, it could have the same effect: fewer flights and higher ticket prices.
But what if stablecoins offer points, too?
The New York Times reported this morning that big US banks planning to issue stablecoins also “plan to operate rewards programs, similar to existing credit card promotions, to woo customers to their own coins.”
The Wall Street Journal reports that Binance is making a concerted effort to promote World Liberty Financial’s USD1 stablecoin, presumably to curry favor with President Trump.
Amusingly, much of it is happening on PancakeSwap.
90% of the trading in USD1 happens on the breakfast-themed decentralized exchange, where volumes exploded over the last two months.
The reason? “Crypto investors were chasing prizes worth up to $1 million for generating as much USD1 trading as possible as part of a ‘Liquidity Drive.’” (I’m guessing paid by Binance.)
Popular USD1 pairs include Torch of Liberty and Eagles Landing — memecoins launched with the explicit goal of getting people to use the president’s stablecoin.
Despite the America-first branding, most of the activity happens in China: “Traders, mostly writing in Chinese, gather in groups on the Telegram messaging app to talk about competing for rewards paid out to top users of USD1 and advertised by PancakeSwap.”
Recent events have left many wondering why Trump is being so nice to China.
Could it have anything to do with a Chinese crypto exchange paying Chinese traders to use a US president’s stablecoin, to trade US-themed memecoins, on a US-breakfast-themed exchange?
I mean, it’s only natural to feel more generous toward someone that’s making you a lot of money.
Improbably, I know. The US-China détente is probably not about PancakeSwap.
But we can’t rule it out!
Which is wild.
If memecoin traders on PancakeSwap ease tension between China and the US, it will all have been worth it.
DATs are more expensive than you think
BitMEX Research details the hidden costs of investing in digital asset treasury companies.
Many DATs pay an outside asset manager just to hold on to their crypto for them.
The Solana DAT Upexi, for example, pays an annual fee of 1.75% of its assets to custody its SOL tokens.
Verb Technologies, a Toncoin DAT, pays an annual “advisory fee” equal to 2% of its market capitalization (every year!) to the investment firm Kingsway Capital Partners.
How much there is to advise on with a DAT is unclear — you just buy the token, right?
And paying your advisor as a percent of market capitalization instead of NAV seems particularly egregious.
MEI Pharma, the Litecoin DAT, pays 0.75% a year to an advisor and 1.75% a year to an asset manager.
ATNF, the latest ETH DAT, pays an asset manager 2% assets for custody, with a hefty annual minimum of $1 million.
ATNF is up 113% this week, so you can see why investors might not care just at the moment.
But they should because the “tyranny of compounding costs” is inescapable over time.
Most of these new DATs issue warrants and/or options to their advisors as well, which will dilute shareholders when exercised.
BNC, the BNB coin DAT currently trading at $28, has granted options to its advisor at an exercise price of $0.00001 per share.
“In some cases,” BitMEX adds, “there is often an incentive or payment linked to the market capitalization or premium to mNAV.”
You can also throw in the cost of the C-suite incentives, payroll, legal advice, banker advice, auditor fees, exchange-listing fees…
All of which must add up to multiple percentage points of NAV per year. Every year.
Or you could hold an ETF for an all-in annual fee of 0.2%.
Or hold the crypto yourself for a fee of 0.00%.
“The end game here is that many of these companies eventually trade at a significant discount to mNAV and become zombies once again,” BitMEX concludes, “potentially still paying significant fees.”
Emphasis added to make John Bogle roll over in his grave.
Markets have a knack for chasing any profitable strategy right up to its breaking point — and for DATs, they may have hit it this week.
Could a Bonk treasury company be to DATs what Pets.com was to e-commerce — a cartoon mascot that ends up discrediting the whole category?
Maybe. The token dropped 5% after the announcement.
Merger arbitrage comes to crypto
The financial blogger Mojo explains why “merger arbitrage” is the best way to learn about markets.
Speculating on whether a company with a pending takeover offer will ultimately be bought and at what price requires deep knowledge of both bidder and target, the industry it’s in, antitrust law, how the regulatory bodies work and much more.
It also makes you think harder about investing: “Merger arbitrage forces systematic thinking and mastery of process in ways that picking growth stocks never could,” Mojo writes.
Unlike most investing, merger arb generally requires you to be right for the right reason — being carried along by momentum or catching a narrative won’t save you from lazy decision making.
I’d argue that being right for the wrong reason is especially prevalent in crypto.
If so, the merger-arb situation announced this week might be especially educational.
On Monday, the LayerZero Foundation, which develops the LayerZero messaging protocol, proposed the acquisition of Stargate, a bridge protocol that uses LayerZero.
Just like a stock-based deal, the foundation’s offer was $0.1675 per token, paid in ZRO at a ratio of 1 STG to 0.08634 ZRO.
To know whether that presents an opportunity for arbitrage (by buying STG and shorting ZRO), you’ll need a deep understanding of DAO governance, how both protocols work, who the stakeholders in each community are, the crypto borrow-and-lend market…
There’s a lot more to it than, say, guessing how much the market will overpay for a DAT.
“Merger arbitrage strips investing down to its essential elements,” Mojo sums up.
Crypto investing could use some of that, I think.
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