🟪 Wednesday Treasure-hunting Advice

Wednesday Treasure-hunting Advice

An underappreciated feature of finance in 2023 was the return of treasure hunters.

This new breed of modern pirate made headlines in November when a court ruled that $40 million of silver found at the bottom of the Indian Ocean by an exploration company controlled by hedge fund billionaire Paul Marshall belonged to the country of South Africa.

The haul was recovered from the wreckage of the SS Tilawa, which was sunk by a Japanese submarine in 1942 while carrying 2,364 bars of silver destined for the South African Mint.

The ruling has reduced Marshall to appealing for a finder’s fee, but others have had better luck: Hedge-fund manager Anthony Clarke has been hailed as "the most successful shipwreck hunter of modern times."

The advent of battery-powered, remotely operated submarines capable of cutting open the hull of a wrecked ship and extracting literal treasure chests (conveniently filled with hard-money precious metals) has made the financing of treasure-hunting expeditions an attractive investment — again.

In 1687, the treasure hunter William Phips delivered to London the silver and jewels recovered from a sunken Spanish galleon he had been commissioned to recover in the West Indies.

After paying his crew and giving the king his cut, Phips returned £190,000 to the partners that funded the expedition — a 10,000% return on their investment.

That eye-popping result ignited a craze for sunken-treasure expeditions, funded by the financial innovation of selling tradeable equity shares to the public.

It was the first-ever IPO boom, leading to a bubble that quickly popped: Subsequent expeditions found nothing of value. Investors were wiped out.

I cite this episode of pirate finance not only as an excuse to quote the great philosopher Jack Sparrow but also because there’s an investing lesson here.

If, in 1690, you thought sunken-treasure expeditions were a great idea, you were right — but 332 years early.

If you thought the expeditions were a bad idea, but that the innovation of tradable equity in joint-stock companies was a good one, you were both right and not too early — it was only a couple of years until the next investing mania swept London markets.

But buying busted sunken-treasure stocks was not the way to play it.

At that early stage of finance, there was no index of blue-chip equities to buy and hold through all of the subsequent booms and busts.

To make money investing, you had to presciently buy into whatever happened to be the new, new thing — not hunt around amid the wreckage of the previous new thing. 

Investing in crypto in 2024 feels about the same.

Wen breakeven?

Bitcoin’s 2023 performance (+150%) compares favorably to many of the year’s best equities (like MSFT and META, up just 55%), but the Nasdaq 100 finished the year at an all-time high, while Bitcoin still has another 50% to go before all of its HODLers are made whole.

Why are equities at or near all-time highs, but crypto is not?

It may simply be that the traditional buy-and-hold strategy of waiting for old things to hit new highs won’t work in crypto.

You may have to always be looking for the new, new thing instead.

Consider that, if you bought the very top of the Nasdaq bubble in 2000 it took you 17 years to get back to break-even, but you’d now be up a respectable 72% (a far better annualized return than what you’d have gotten in a savings account).

Now imagine how long you might have to wait to breakeven if you bought a basket of

crypto blue chips like MKR, AAVE, COMP, and UNI at the top of the 2021 crypto bubble.

My guess: approximately forever.

So here’s why I think the crypto mantra of HODLing might not work as well as it does in equities:

Math: If you ride something down 90%, as most altcoins were last cycle (and probably next cycle, too), you have to subsequently make 1,000% just to get back to breakeven (someone please check my math).

Iterating tech: Crypto is open-source and composable technology, so the best thing will often be the newest thing — and this will happen fast (crypto tech will continue to advance far faster than treasure-hunting tech).

Market psychology: At this early stage of its development, crypto "investing" is really just trading, so everyone's always looking for the shiny new toy.

Supply: Because there is no SEC-like gatekeeper approving listings on decentralized exchanges, there is a constant supply of shiny new toys to tempt buyers. Anyone can "list" a new token, so lots of people will.

Demand: The pool of buyers is limited. So far, it’s mostly the same crypto-native money cycling from one thing to the next (not much new money seems to get any further than Bitcoin), which makes altcoin investing more of a zero-sum game than is the case in stock market investing.

Early-stage investing: Crypto as an asset class is effectively tradeable VC (which should be an oxymoron, but isn’t). Buying VC-backed startups 90% below peak-market funding rounds would likely be a losing strategy — because if they’re down 90% they’re probably going to zero. 

(Note: No matter what price you pay, the downside is always 100%.)

Buy and HODL?

The fun thing about crypto (for a newsletter writer, at least) is that we’re speedrunning the history of finance. 

People generally take that to mean that we’re in a phase analogous to the 1990s dotcom bubble and I think that’s probably true in terms of the infrastructure that’s being built out.

In terms of crypto investing, however, we may not be much past the 1690s — it still feels too early to simply buy and hold.

Many treasures will be found, but it’s likely to take as much madness as brilliance to find them — and the wreckage of previous crashes may not be the place to look.

― Byron Gilliam

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