An Analogy for Some Facets of Crypto - Hedge Fund Alpha (formerly ValueWalk Premium)

An Analogy for Some Facets of Crypto

What I am writing was sparked by what is happening with FTX, which reminded me of promoted penny stocks. Now, before I go on to that, let me mention what the results were regarding the promoted penny stocks that I wrote articles about the last one of which was written a little less than seven years ago. I only wrote about promoted penny stocks when I personally received a promotion, whether by snail mail or email.

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Of the 32 stocks I wrote about, how many failed in entire? Twenty-four. How many have a market cap over $1 million? Three. How many actually appreciated in price from the time I wrote the article? One, Barfresh [BRFH], which was the only one the I said seemed legitimate.

Penny stocks are less of a problem today as a result of the efforts of Seeking Alpha, and to a far lesser extent me. But now we have a new problem — cryptocurrencies that are not widely traded.

FTX had several cryptocurrencies which they held on their balance sheet where they held a huge amount of the cryptocurrency relative to the float, or trading volume. This included FTT and Serum, among others. If FTX sold those cryptocurrencies in size to raise US Dollars, the price would quickly go to something near zero.

The same is true of promoted penny stocks. If they did a large issuance of stock, the price would quickly go to something near zero. (Far better to do a rights offering.) Instead, they quietly deal stock in small amounts at a discount to the market price to pay for services, goods, etc. Promoted penny stocks are the only investment class where the statement of shareholder equity is the most important statement.

As such, FTX using the value of the last trade, overvalues their holdings of worthless crypto. It is actually more valuable for them not to trade, than to swamp the market. That said, what will happen when they are forced to liquidate? (Think of Luna and Terra.)

You could structure the accounting for assets on the balance sheet at entrance value, current value, or exit value. Each has its implications — success, survival, and failure, respectively. Unless we decide to have multiple balance sheets and income statements, which I have suggested in the past, but will never take place, a single balance sheet will never represent reality — survival is probably the best overall option, and that is close to what GAAP does, with its many imperfections.

As such, please realize that most unaudited intermediaries of cryptocurrencies are likely insolvent. It is time to liquidate and go back to US Dollars, prone as they are to inflation. Remember, if you are slow, you may end up with nothing.

Article by The Aleph Blog.

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