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"Managers who are paid handsomely to misallocate capital will do so."

— Pat Dorsey

Thursday misallocated mailbag

Q: Are memecoin volumes sustainable?

It’s a good question to ask because a lot of crypto’s earnings are dependent on memecoin trading and it’s not clear how sustainable that is.

The TRUMP coin, for example, has already round-tripped the modest bounce it got after the president posted about it last week, and the leading Ghibli memecoin is only worth $24 million at the moment.

Just a few months ago, both these events would have generated a lot more trading activity, so anecdotally at least, it feels like people are losing interest.

It’s not hard to see why.

The memecoin launchpad pump.fun has generated $600 million of revenue in its short 14-month existence and users don’t have much to show for it: Of the 8.7 million tokens launched, only four now have market caps above $100 million.

Worse yet, the market cap of all pump.fun coins combined is $3.3 billion — only 5.5x pump.fun’s revenue.

If pump.fun’s $600 of fees is its take rate for listing tokens, it’s about 3x what investment banks get for listing stocks (they typically charge 6% for IPOs).

Memecoins are not stocks, of course, they’re lottery tickets — some of which do pay off.

Someone made 4,680x their money in the Mubarak memecoin last week (turning $232 into $1.1 million).

But chances are that was an insider of some sort.

With lottery tickets, everyone has the same chance to win, at least — and you don’t have to spend your life in Discord chats looking for a ticket to buy. You only have to go to the nearest 7-Eleven.

As either investments or lottery tickets, memecoins seem like a bad product to me and that presumably makes them a bad business.

The data, however, tells a different story: pump.fun revenue appears to have bottomed out at about $1 million a day.

I’m not sure why people are still playing this game, but with so much of the crypto industry’s revenue downstream of memecoin trading, we should thank them for it.

Q: Should I take investment advice from crypto exchanges?

Binance Alpha is a "pre-listing token selection pool" that, as a gatekeeper to the Binance exchange, is a kind of the SEC for crypto. 

But it’s a bizarro type of SEC that also offers investment advice: "Curated through Binance’s industry expertise, the tokens showcased on Binance Alpha demonstrate strong community interest, increasing traction and alignment with key market trends."

I guess that’s not exactly a buy recommendation, but it’s certainly an endorsement — the tokens on Binance Alpha are "curated" using "advanced insights."

The SEC doesn’t curate companies for investors, it just makes sure they’ve filled out all their forms correctly.

But I’ll admit that’s apples to oranges because you’re not really investing on Binance Alpha, you’re shopping: "Once confirmed, proceed to the checkout window to finalize the purchase."

Only in crypto.

Q: Should protocols do buy backs?

Yes — if a protocol is generating revenue, I think it should return most or all of that revenue to token holders.

I wouldn’t say that about equities, where buy backs are a capital allocation decision: Companies should only buy back their stock if doing so delivers a higher return than what reinvesting in their business does.

But protocols are not companies and tokens are not stocks. 

Stocks exist because they’re a legal claim on a company’s earnings and assets.

Tokens exist mostly because they’re a way to bootstrap usage of a protocol.

"There is often no reason why the token has to exist beyond the initial bootstrapping phase," Jeff Dorman explains.

As such, I agree with Dorman’s conclusion that buy backs are what give tokens value — and maybe even the only thing: "The goal HAS to be to deprecate the token, or else there is no value and no reason for it to exist."

I’d even go a step further and say protocols should be returning capital during the bootstrapping phase.

My favorite kind of tokenomics is the typical DePIN model in which most or all revenue is used to buy tokens while tokens are simultaneously issued to pay expenses.

Buying and selling at the same time is not something you’d ever want to see a company do, but protocols aren’t companies.

Q: What about Bitcoin?

That’s a fair point — Bitcoin will never return revenue to token holders (because it doesn’t have any revenue, only expenses) and yet, it’s worth quite a lot.

Jeff Dorman describes this as a sleight of hand: "The greatest trick crypto ever pulled was getting people to believe that Bitcoin was somehow safer than a cash-producing asset with buy backs."

But the trick has been pulled and now, even without revenue to return, Bitcoin has real value.

Q: What’s the most egregiously misallocated capital in crypto?

Pump.fun co-founder Alon told Bankless this week that "all" of pump.fun’s $600 million of revenue "has been reinvested into creating a better product."

That seems like a terrible decision to me.

I admire the team’s belief in what they’re doing: They think memecoins have real value (as measuring sticks of attention and virality) and that memecoin trading is therefore here to stay.

If pump.fun turned out to be a one-cycle phenomenon, Alon told Bankless, "that would be kind of pathetic." 

Maybe he’s right (and the crypto industry should probably hope that he is, since they pay most of the bills). 

But if pump.fun was listed on the stock market, shareholders would probably be demanding to get paid now, in this cycle.

They would almost certainly view investing in memecoin infrastructure like they would building new cigarette factories — no one thinks we will need more of either.

This is why British American Tobacco returned 75% of its free cash flow to shareholders last year.

Memecoin protocols should probably return 100%.

Q: Is crypto for young people?

Crypto is dismissive of "boomers" (like myself) but my informal survey of young people suggests they’re not disproportionately interested in magic internet money — if they’re interested in investing at all, they’re almost always more likely to ask me about stocks than cryptos.

More scientifically, a survey of South Korean investors found that one in four crypto investors are over the age of 50 — and that those over 50 account for about half of the investors holding more than a billion KRW of crypto.

Maybe that’s just because boomers have more money to invest.

But also, if you're 15 years old, Satoshi invented Bitcoin before you were born.

That makes Bitcoin to a 15-year-old what the World Wide Web is to a 30-year-old and what Pac Man is to a 40-year-old.

It’s not the new new thing anymore.

— Byron Gilliam

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