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April 2022: Return of the 99

April 2022: Return of the 99

Hi folks, if you missed last month’s newsletter, I accidentally sent it from a noreply address… ooops. Here it is if you missed it.

A quick summary for April:

  • 🍦Return of the 99

  • πŸ§‘β€βš–οΈ What Facebook and Bitcoin have in common

  • 🎺 Beware of salsa bands

  • πŸ’‘ Is it worth buying Twitter shares?

🍦Return of the 99

Absolutely huge time of year in Ireland chomping into soft serve ice-creams with a Cadbury chocolate flake poked into them. Known locally as a “99”, we’ve been chowing through winds of winter, but now’s a great time to have another one.

There’s some story about them being called 99s… because of Italians… and elitism… and that sort of thing. I remember 99s being 99 pence though as a kid, so that’s the meaning for me – even though one cost me €2.50 today.

To be honest, I don’t usually get the flake. Today I went a bit mad and spent the extra 30 cents… And it’s only Thursday when I’m writing this… so I’m really going mad.

The good news here with inflation is that all will soon be well and they’ll cost €99.

πŸ§‘β€βš–οΈ What Facebook and Bitcoin have in Common

Both will trend towards being worth zero…

That’s almost guaranteed in the very long term, and certainly not impossible in the short to medium term. However, the point I want to make is more technical. It’s about regulations.

One first order motivation for regulation can be to moderate the influence of big companies, like Facebook. However, a second order effect is that regulation is exactly what large social media companies want:

  1. Lots of regulation around content and moderation requires lots of expense to implement. Early stage startups project forward to when they are big (and investors invest based on the prospect of a startup getting really big), they see these costs in the future, and this significantly reduces the business case for founders and investors to start the business.

  2. It’s much easier for large companies to have clear regulations to follow and then blame the regulations if there are issues (which there inevitably will be for something as difficult as social media). Without regulations it is hard to “win” with public perception on social media moderation – because it is incredibly subjective. It’s not that governments are necessarily better at making subjective decisions on what should be allowed. However, by laying out rules, it absolves businesses of difficult problems.

In short, a business climbs a ladder quickly, regulators say they have climbed too high, so they penalise them by taking the ladder away. Now nobody else can climb there so easily… although maybe a new startup arrives with a jetpack.

This mental model of regulation is mostly wrong and incomplete, but is under-appreciated as a perspective. Byrne Hobart, in his newsletter “The Diff” frequently points out where this dynamic occurs with large companies. I see this dynamic myself in considering startup ideas to pursue – it’s always going to be tougher to build a successful business and raise capital in an industry where the ladder has already been pulled up (e.g. payments, banking, social media).

Regulation is important in certain industries, but the lessons I see here are:

  1. Having exemptions for smaller companies. One example here is that Ireland is increasing corporate tax rates to 15% but keeping 12.5% for businesses that have revenue less than €750M. Similar rules I think make sense for employment laws.

  2. Encoding “pulling up the ladder” into anti-trust law.

Wow, that’s more than I intended to write. Let me get to the point, which is comparing Facebook to Bitcoin… It’s a very loose comparison, but the idea is that increasing regulation in crypto may well pull the ladder up after Bitcoin.

Already, in terms of crypto regulation, I see a few trends:

  • Bitcoin (and also Ether, although I won’t get into that) are treated as property (e.g. gold or a house).

  • Cryptos that are allowing owners to vote and earn rewards (dividends) based on protocol performance are slowly being pushed into the “security” category – which roughly means they are considered like owning shares in a public company like Apple.

  • Cryptos that are trying to mirror the price of the dollar or euro (or whatever currency) are moving (very slowly) towards being regulated a bit like e-Money or digital money (i.e. checking there are enough reserves backing the crypto coins).

  • There’s probably then another category – a new category that isn’t clearly matched onto current regulations – where there aren’t clear controlling groups of people controlling operations that affect the price of the crypto.

One has to understand that investing in companies and dealing with company shares is highly regulated, as are digital money licenses. Property has some regulation, but typically doesn’t involve the same detail as documenting company performance or currency reserves.

Bitcoin is quite simple in the sense that one can’t vote with Bitcoin. One also isn’t entitled to any dividends. So, it’s clearly not like owning a share of Apple. To some degree, the less “useful” (in the sense a public company is supposed to be useful) a crypto is, the harder it is to force it into an onerous category of regulation. This leaves governments and regulators with the only option to allow it as property or ban it for being “speculative” or “useless” or “harmful” (e.g. due to using too much energy).

The challenge with taking a ban approach right now – at least in the US and Europe (because it worked in China) – is that possibly too many people already own Bitcoin, and possibly too many of those are technologists – and that increases the collateral damage in banning it. Crypto has a reputation of being a libertarian or anarchist coder geek thing. That said, I’ve been surprised with the demographics of people I have met in the last year that own some Bitcoin or at least speak positively or curiously.

To summarise. There’s a degree of the ladder being pulled up after Bitcoin, but this is partly because a lot of crypto that is not Bitcoin has opted to try and replicate a lot of things that are already regulated. Bitcoin doesn’t try to be much of what is already regulated.

Basically, trying to do what is already regulated, in a slightly different form, is likely to run into trouble in the next few years. Protocols/technologies in crypto will find it increasingly important to become open initiatives that are governed by encoded rules, but not by clearly defined groups of people (as companies are).

Disclosures: I own Facebook/Meta stock (I think it’s important to have capable people running social media and, while imperfect and unpopular, I think Zuckerberg is among the best there could be running it) and Bitcoin (it’s possible the US and Europe are in the late stage of a big economic cycle [good video from Dalio]). I’m much less than 50% confident that either of these investments are good ones. It’s more that I think the average investor is too negative on Facebook and on Bitcoin.

🎺 Beware of salsa bands

Live bands are great – more energy, more interaction, more fun, but – for the love of God – the songs played by live salsa bands just seem to last forever. I’m running out of moves after two minutes, and they are still chiming away after five, ten, fifteen. That’s an exaggeration, but five minutes of leading the same spin certainly can feel like fifteen or longer.

πŸ’‘ Is it worth buying Twitter shares?

Rather than add another blog covering whether Musk buying Twitter is a good or bad thing, I just focused on seeing if there’s a way to make a good investment.

Here’s very roughly how the acquisition of a public company works:

  1. Someone makes an offer for the company. The offer typically has to be at a premium to the price of the shares when the deal was announced. This is because to “buy” a company, usually one needs to buy 51% of the shares. You might buy a small amount of shares at the market price, but if people know you need to buy 51%, they’re going to put their price up! Hence the premium.

  2. Once the offer is announced, shares will start to move towards the price of the offer. If shares were worth $30, but the offer is $54.20, then obviously the shares will increase in price on the open market.

  3. There’s uncertainty as to whether the deal will be accepted so the price won’t usually go quite up as far as the offer (unless people think there’s an even bigger offer coming).

  4. Now, let’s assume the offer is accepted in principle… the share price should now move quite close to the offer price. That said, the share price may not get all that close to the offer because there can still be risks around the offer clearing (e.g. anti-trust, the buyer finding the money). One specific example earlier this year was Microsoft buying a computer game company (Activision Blizzard). Even when the deal was agreed in principle, Activision shares traded more than 10% below the offer price.

So, if a deal has been announced (as between Twitter and Musk), does it make sense to buy the shares? Eh, no.

I check Twitter and the news most days, but other people check those things too. The price of Twitter shares on any given day right now – from my perspective – just reflects the probability that the deal will go through. I don’t have any extra knowledge on whether it will or not. So, if I want to have a gamble, I could buy some Twitter shares – and the deal may or may not go through. I could also go down to Paddy Power and do some crossed-doubles bets on this Sunday’s horse racing (also not recommended for economic gain, but fun).

So, deciding whether to buy shares requires a more specific rationale then that, which is very hard to find. I don’t have any guaranteed ways to make money (although I have a few guaranteed ways to lose money). I talk about one low-probability idea on this podcast series (still ongoing). I give it a less than 10% chance of working.

Alright folks, that’s it for this month. One question though… how did you like this month’s newsletter?

🍦🍦🍦 I’m lactose intolerant but still loved it

🍦🍦Only read the part about 99s

🍦Not even worth a flake

You can reply to this email because (unlike the last time) I didn’t write from a noreply address πŸ™ˆ, cheers, Ronan

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