Welcome to the Block & Mortar newsletter! Every week, I bring you the top stories and my analysis on where business meets web3: blockchain, cryptocurrencies, NFTs, and metaverse. Brought to you by Q McCallum.
Reading online? Subscribe to get this in your inbox whenever it's published.
(Photo by CoWomen on Unsplash)
Don’t let the block of text fool you. This is indeed the monthly media roundup, in which I drop short notes on interesting podcasts and such. The first (not-a-podcast) segment is a lead-in to the second.
But first, a technical note
Feel free to skip to the next section if you’re already familiar with the mechanics of short selling.
To set the stage, let’s talk about trading. Assuming you are looking at one stock at a time (and not, say, playing some game that relies on price differences between two stocks) the most common way to make money is to “go long.” It’s the idea behind the age-old “buy low, sell high” guidance:
- You think a company’s share price will increase
- You buy some shares
- You wait for the price to go up
- You sell the shares
The difference between your (low) buy price in step 2 and (high) sell price in sell 4, that’s your profit.
What if you’re wrong, and the share price falls? The nice thing about going long is that you’ve capped your downside risk: that share price can only go as low as zero, so the most you can lose is the amount of money that you put in.
The other way to make money in the stock market (again, assuming the one-stock-at-a-time approach) is to “sell short.” This uses the same mechanics as going long but in reverse: “sell high, buy low”:
- You think a company’s share price is going to fall
- You borrow some of those company’s shares from someone
- You sell those shares on the open market
- The share price does indeed fall
- You buy shares (at the new, lower price) on the open market
- You return those shares to the person from whom you borrowed them
Your profit is, once again, the difference between the (low) buy price in step 5 and the (high) sell price in step 3. You’ve made money because the price has gone down, not up.
And that is precisely why your risk exposure is completely different as a short seller: there is no maximum price for a share of stock. If you are wrong and the company’s shares skyrocket, you lose money when you have to buy those shares back on the open market (step 5). You can lose … let me double-check my calculations here … up to infinity dollars.
OK, fine. You can’t really lose infinity dollars. But you can certainly lose all of your money if the price goes so high that you can’t afford to re-buy the shares. And I do mean all of your money. For your entire trading operation. Unlike the go-long case, your losses aren’t limited to the budget you’ve allocated for just this one stock deal.
Being a short-seller, then, means leading a double life as a researcher and detective. You need to find hard proof that a company is doing something that will cause its share price to drop. (Say, “they’ve been faking their earnings” or “a whistleblower will soon go public about some defective devices” or “their overseas factory is about to go on strike.” )
Expect the company’s execs to put up stiff resistance to your research efforts, because they will not want the truth to come out. You’ll also face ire from the investors rallying around the company, as they hold firm in their belief that the price can only go up.
That takes us to our first podcast:
The other big short
(Listening time: 1hr)
This episode is pushing 18 months old – it’s from May 2022 – which is practically ancient history in tech terms. But it’s such a good lesson on short-selling that I just had to share it here.
Kevin Zhou of Galois Capital made a name for himself by shorting the TerraUSD algorithmic stablecoin. This interview aired just a few weeks after the Terra/Luna collapse.
Zhou explores how he researched and placed his short. He also compares algorithmic stablecoins to tradfi structured products, and notes that running such a stablecoin is similar to running a central bank. (But without certain levers available to a central bank, which is precisely how algo stablecoins get into trouble.)
Stick around for some general truths about short selling. I was already familiar with the idea that being too early is as good as being wrong, but I hadn’t considered how much the true believers – who are in denial about the token or stock in question – make your strategy work. They will happily buy from you as you execute the “sell high” step of your short.
If this segment has piqued your interest, I’d encourage you to look into other famous short sellers such as Jim Chanos, Andrew Left, Marc Cohodes, John Paulson (he won big betting against the 2007 housing bubble), and George Soros (who made an absolute mint shorting the Pound back in 1992). I also recommend Dan McCrum’s Money Men, in which some short sellers help the author piece together Wirecard’s alleged fraud.
Crypto frictions
(Listening time: 25mn)
Money Reimagined host Michael Casey has a seemingly simple question: what’s holding back crypto adoption? As you would expect, guests Jan Van Eck (CEO, Van Eck Funds) and Matt Hougan (Chief Investment Officer, Bitwise Asset Management) hit on the issue of shaky, uneven crypto regulation across the global landscape.
The pair also point out that Bitcoin leads a double life as both an investable asset class (such as gold) and a technology (like a relational database), which complicates things. On the investment side, they compare and contrast gold and Bitcoin as investment vehicles.
Van Eck closes with his thoughts on the core of the US “is crypto a security?” regulatory debate:
“Tokens aren’t a security or not a security. They’re kind of a mix. It’s complicated! So get over it. It’s just a new thing. And if you keep trying to define it as one thing or another, it’s very confusing to the rest of the world.”
Mixing bits with (squishy) atoms
(Listening time: 30mn)
I’ve mentioned the Pudgy Penguins NFT collection a couple of times before, most recently because of their move into physical toys.
Pudgy Penguins CEO Luca Netz joins host Jacquelyn Melinek and TechCrunch+ Editor in Chief Alex Wilhelm to shed more light on this project. If you have any interest in building a bridge between crypto and retail goods, this is worth a listen.
First up is the question of why this is happening at all. Netz explains that moving from digital to physical goods was a diversification method both for the company (it reduces their exposure to craziness in the crypto world) and for consumers (by giving them something tangible). As a bonus, the toys will help consumers develop interest in Pudgy Penguins without needing to understand crypto. They simply buy the plushie and scan the QR code, then they’re off to the Pudgy World online experience.
Netz is very open about the economics of selling combination toy-NFT products. Retail presents a variety of challenges you just don’t get with digital-only goods, such as people who abuse a store’s return policy. (“Buy toy,” “scan QR code to get NFT,” “return toy.” That amounts to “free NFT.”)
Netz closes out with some solid guidance for any company venturing into web3:
“Being a web3 business is working with your community, not selling things on the blockchain. Understanding how to leverage the hive mind is the most powerful part about being in this industry. And if you’re not doing that, I would say you’re not doing web3 appropriately.”
Learning from someone’s tale of woe
My Worst Investment Ever: Mark Venables – Do Your Best to Secure Your Crypto
(Listening time: 20mn)
Andrew Stotz’s My Worst Investment Ever is not a crypto-specific podcast. (Given how crypto has gone for the past couple of years, though, I certainly see how someone could get that impression.) Guests share their investments gone wrong as a way to help listeners avoid the same troubles.
In this episode, guest Mark Venables declares that a combination of “common sense and cold wallets” will steer people away from most crypto trouble.
The first part of the interview is Venables’s slightly-technical explanation of crypto devices (that’s the “cold wallets” part) and how crypto differs from tradfi’s approach to separation of assets (part of the “common sense”).
The second half is his story.
No spoilers. It’s worth a listen.
The wrap-up
This was an issue of Block & Mortar.
Who’s behind Block & Mortar? I'm Q McCallum. I've spent the past two decades in the emerging-tech space. And I'm very interested in web3 use cases.
Credit where it's due. Big thanks to Shane Glynn for reviewing early drafts. Any mistakes that remain are mine.
Reading this online? Or as a forward? Why not sign up? Get Block & Mortar news in your inbox, whenever it's published.
Privacy statement: I don’t share/rent/sell your personal info. Seriously.