Is bribery sustainable as an investment thesis? The market doesn’t seem to think so. When the market assigns a multiple of 2x P/E to a business, it means investors think that business is not going to be around for long.
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”
— Bill Gates
Predicting the Future
Things were different when I started out as a trader in Germany in the early 1990s.
People smoked in the office. I took up smoking myself because the traders who sat on either side of me both smoked all day, right there on the trading desk. I figured, if I’m going to get second-hand lung cancer anyway, I might as well enjoy the occasional cigarette.
Insider trading and front running were legal. Floor traders working for banks would sometimes buy a stock in the morning (ahead of a large order, most likely) and if it went up, they’d book the profit against their personal brokerage account. If it went down, they’d book the loss against the bank’s account.
And bribery was an accepted corporate strategy — bribes were deductible as a business expense under German tax code.
I learned that last one only when employees of Siemens were indicted on charges of bribing foreign governments in 2008. Bribery had been made illegal in 1999, but the Siemens division selling telecoms equipment to developing countries carried on doing it for a number of years — times had changed, but they just didn’t know how else to sell their routers and things.
Times change even faster in crypto, of course, which may explain why the Convex token, built on the accepted crypto practice of bribery, trades on 2x P/E.
Software or Commodity? Or Commodity Software?
Bribing token holders for their votes is not the immoral equivalent of bribing corrupt politicians for government contracts, so I don’t expect Convex will ever have any legal problems.
But is bribery sustainable as an investment thesis?
The market doesn’t seem to think so.
When the market assigns a multiple of 2x P/E to a business, it means investors think that business is not going to be around for long.
At the current rate of earnings, you’d only have to hold Convex’s CVX token for two years to get your investment returned to you in dividends. (Well, bribes, in this case.)
Any additional dividends paid in year three and beyond would be free money.
Is that too pessimistic?
If you think cryptos are tech stocks, maybe so.
Microsoft, for example, trades on 27x P/E — which suggests it’ll be a long wait to get your initial investment returned in earnings.
If you think cryptos are commodities, maybe not.
US Steel, for example, trades on 1.1x P/E.
Convex’s commodity-like multiple implies that the market thinks Curve Wars' bribes are more like steel and less like software.
Despite the fact that Convex is literally software, I can sympathize with that view: I’m more confident that people will still be using Microsoft Office in 27 years than I am that people will still be bribing Convex in two.
But I only say that because Microsoft is simple and Convex is complicated.
The opportunity for investooors is that the complexity of crypto in general and of Convex in particular is creating an opportunity for those that make the effort to understand it.
If you buy CVX today, and Convex is still collecting hefty bribes in five years time, you’ve hit a homerun.
And that could easily be the case: I may miss out on the Convex opportunity simply because, as per Bill Gates, I am overestimating the change we’ll see in two years and underestimating the change we’ll see in twenty.
If DeFi is still recognizable in two years' time, Convex may turn out to be more software and less commodity than the market is currently implying.
Blockwork’s research analyst Dan Smith thinks we’ll soon find out:
If strong bribe revenue continues through the bear market when protocols cut spending or cease to exist, I am cautiously optimistic we will see new protocols bribe for liquidity in the future bull market.
Doing the Work
Predictions are hard, especially about the future.
With crypto crashing, the WAGMI days of buy-anything-and-it’ll-probably-go-up appear to be over.
Which means that, going forward, we will have to put in the work required to have an opinion on the outlook for complex things like Convex.
(You could start by reading Dan’s report on Convex here.)
Everything happens faster in crypto, so it may be that in five years’ time today’s DeFi protocols will look as antiquated as smoking cigarettes in the office.
How can you partake in week 1 of the Arbitrum Odyssey event to earn free NFTs and potentially set yourself up for a future airdrop allocation? (Thread) — Blockworks Research
Here are some great slides from @NFT_girl on a few core components of a web3 project: Community, Utility, Partnerships — Chasegm
I’ve studied 100s of mental models to become a better Crypto Investor. (Thread) — Covduk
Crypto is reaching a breaking point, and it has nothing to do with the Fed, Celsius, jpegs, or DeFi. (Thread) — Jack Niewold
I have discovered evidence that TFL and Hashed were manipulating Anchor interest rates (Thread) — FatMan
