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Sharpe Ratio and a Massive Stable Coin Collapse Also Small NFT Note
Level 1 - NGMI
Welcome Avatar! We’re back from our short break to witness one of the largest catastrophe’s in crypto history. Up there with Mt. Gox, the ICO bubble pop and Bitconnect. Keeping it honest here, we never looked deeply at Luna (like normal people it isn’t possible to look at all 1,000+ projects). That said, with the peg broken down to $0.80 you can safely assume one thing: BIG REGULATION is coming. A double digit billion dollar blow up in a day is too big to ignore. In addition, the bigger question is if Jump Capital gets blown out by this (no idea since all of the changes have occurred in the last 24 hours).
Before going into all of the Luna items (high-level only) we do want to pause and explain the Sharpe Ratio. In a bull market people believe that a $10 investment that goes to $20 in scam coin is the same as investing $10 into a stable stock that goes to $20. They are learning (in real time) that standard deviation of returns are real.
Part 1: Sharpe Ratio
As a quick reminder, the best way to try and “run it up” is to build/help create something. This has been a theme for over a decade but unfortunately a lot of left curve people entered the space over the last 12 months and believe “running it up” means buying $1,000 of <$50M market cap coin and praying.
That aside, if you’re looking to generate high returns, you need to make sure you’re being appropriately compensated for it. If you buy a <$100M market cap computer coin and your returns are equal or worse than simply holding ETH or BTC you didn’t make a good investment. You made a terrible investment that happened to go up in-line with BTC/ETH.
Here is the Basic Formula for the Sharpe Ratio
In short, what this is saying is that you have to look at your overall returns and compare them to the volatility you took. Therefore, for those invested in high-risk items (NFTs, high Beta Tech etc.), it means that if you didn’t beat BTC last year and didn’t beat ETH… those investments were not winners. For those who are ultra intense, it helps explain why 2021 focused more on NFTs vs. DeFi as you could easily calculate your performance vs. ETH.
Basic High Level Strategy: Since most of our readers are under 60 years old (we hope!), you should have a long-term time horizon. If you’re under 40 or so, it means that your net worth today shouldn’t be relevant to your net-worth + 10 years. Even with average stock market returns you should comfortably double or triple your net worth (as long as you stay employed and can cover your cost of living).
Therefore you can do a basic “dollar cost average” strategy with a bit of intelligence behind it. If you are worried about prices declining due to rising rates and other factors you dollar cost into “stable” stuff like the S&P 500 or you pay down your mortgage/improve cash flows. If the Fed capitulates and decides to stop raising rates, you begin buying more of your risky portfolio which is typically crypto, tech stocks, bio tech and anything else with a Beta higher than 1.
Autist Note: For those wondering when they should “sell” or change what they are buying, if you have to ask it means you have too much risk. If you look on griptoe twitter it is clear as day as to who the wealthy people are. They are not panicking, they are making jokes and having a good time. The ones who are panicking are likely individuals who had a great year, ran it up and suddenly the music stopped. Leverage is a killer to the downside and is effectively best for more stable asset classes like homes.
Gambling is in Human DNA. Large Gains with no work.
Conclusion: Since the news is all about Luna we doubt anyone read this section but they should. Both on the upside and the downside. The rule of thumb is to buy large stable stuff if you think things will get ugly and to buy more aggressive items if you think people will forget fundamentals and begin buying meme coins and meme stocks for the next 12 months. Also. You could just buy both aggressive and safe investments every month if you really don’t want to do any work or any research (lets be honest that isn’t much fun though!)
Part 2: Luna - Wow
Not much to say, this is one of the biggest events in computer coin ponzi land. As a note to anyone reading this, we did *not* have an opinion on the project. Paid subs can see it came up numerous times and 1) the team never got back to us to answer questions and 2) we didn’t have time to look at it last year. We won’t be taking any credit for avoiding this blow up and won’t be taking any credit for analysis. Luckily, the latest news gives us enough information to work with along with some serious implications for the future.
Regulation is Coming: If you are foolish enough to not play by the rules (SEC and taxes) the big money is now going to come looking *EVERYWHERE*. Unlike other scams and rugs for $10-100M (yes still big but not gargantuan) a DOUBLE DIGIT billion dollar decline is not going to be swept under the rug. Before anyone says we lack empathy, this was a huge disaster where retail likely lost a ton of money (feel sorry for a lot of them - not all as many were driven by greed).
To give an idea of scale a double digit billion dollar erasure is equivalent to losing an *Entire* S&P 500 company overnight. The WYNN is a $7B valuation high-end casino and the debacle we saw today was larger than that. If you want one conclusion, regulation is coming hard and you better believe they will start with the exchanges like Coinbase.
Jump Capital? To be clear we’re not sure how their books are operating but this is certainly not a good thing for them. They were heavily involved in supporting Luna and now that the stable coin completely broke (currently 77 cents or so and went all the way down to 65 cents), it’s unclear if anyone will ever use the project again.
Emphasis. Perhaps big money can get the peg back to $1 however the bigger question is… Will anyone trust this thing again? We’d bet on no but as mentioned that’s a glance at the situation without following the project closely.
Too Good to Be True? One of the major red flags was the 20% return offered on the project through anchor protocol. This should have scared off a sophisticated investor. Fortunately those don’t exist so instead a large experiment ramped up. As a rule of thumb if you ever see double digit returns and don’t understand the risk associated with those returns… Run. It didn’t even work for bitcoin lending firm Blockfi (still around but everything compressed - 3% return on $3,000 is just not compelling particularly if you lose custody).
Broken Peg: As of this writing a stable coin that is supposed to mirror the US dollar is trading at 77 cents on the dollar.
For those that understand pegs and balancing (every single paid sub should get this by now) it means the project is broken at this time. While the peg can go back to $1 (Jump or another big player steps in), we’re making the case that this blow up was too public and people won’t utilize it. While it was a slow couple of weeks in crypto we will now follow the project on the side to see if anything changes over the next 90 days or so.
Conclusion: You better believe that regulation is coming hard at this point. Stable coins will go first and the biggest “throat to choke” = exchanges. While we mentioned that we don’t want to write negative stuff (since people get upset) being involved with stuff like Coinbase, GBTC and other centralized entities will likely see more operating expense pressures.
Autist Note/Conspiracy Theory: For those that don’t believe the above paragraph ask yourself why Coinbase will no longer disclose new listings. If you were running Coinbase you would *LOVE* to disclose new listings because it brings in new users and creates trading volume (ie. lining your pockets). By going more stealth you would be reducing your revenues and reducing your marketing/attention gathering. Why would a business person do this… unless they had to?
Part 3: New Info on Azukis!
For those that got in, mid-single digit ETH on Azukis, it’s time to free roll it at minimum (yes we’ve done just that at about 15E). You can kick the airdrop and kick one of the 2 you picked up and move on. If you need the money drop all of it.
Once credibility is questioned it means the price will historically trend downward (not financial advice just an opinion) for a few weeks/months and could even wipe it out. The good news is you should be up 125-150% so not to bad given how awful the market has been so far.
Per usual despite being early to it we will auto delete the angry emails despite the price being up well over 100% and much more than that if you use our standard airdrop strategy. Downside of telling it how it is, lots of hate mail!
Feels good to be back! We’ll be working on solving a few issues: 1) people scamming troll Tuesday with stolen memes, 2) ways to help our community earn tokens on the high-end of the spectrum and of course 3) finding a way to afford lentils in these dire times living homeless on a beach.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We may or may not be homeless and set for life. We’re an advisor for Synapse Protocol and on the JPEG team.
You’re Early: Remember that you’re early. If you need to zoom out, see our post here on Crypto versus the Tech bubble (which was only the US stock market).
Below Chart in $Trillions of US Tokens