Thursday, May 12, 2022

Sell your cryptos; Two of the best shorts I've ever seen; Where I'm investing right now; Funny tweet about Chamath Palihapitiya

By Whitney Tilson

1) I don't claim to be an expert when it comes to cryptocurrencies, which is why I've only ever made two calls in the sector – in both cases, when my "spidey sense" was really tingling.

Well, it's tingling again today... and given what happened the past two times, you might want to listen up...

On December 16, 2017, the very hour that bitcoin (BTC) peaked at $20,000, I warned my readers:

In the past week, I've been asked about bitcoin by a parade of the least-knowledgeable investors imaginable – and the only times such foolishness has happened before in my 18-year career were at the peak of the internet and housing bubbles, so I'm calling a top right now.

Blockchain technology is real in the same way that the Internet was real back in 1999 and housing prices tended to go up in the mid-2000s – in other words, a good idea taken to absurd extremes is NOT a good idea!

That said, the greed and speculative nature of humans is inherently unpredictable, so for all I know bitcoin could go to $1 million.

But I do know the ultimate outcome: smoldering rubble, a lot of finger-pointing (where were the regulators?!), and a lot of tears and empty bank accounts, especially among those who can least afford it.

Within a year, bitcoin had fallen by 80% and ultimately bottomed below $3,500.

But I wasn't always bearish...

In the April 2021 issue of our flagship newsletter, Empire Stock Investor, we recommended buying ethereum (ETH) with an entry price of $2,025.16. It quickly doubled over the next month... and in a special update on May 12, we recommended selling 55% of the position at $3,733.95 – banking a quick 84% gain. This morning we sent our subscribers another special update recommending to sell the rest.

So why was I a buyer then and a seller now?

To answer this, I first need to give some background...

Cryptocurrencies are inherently speculative, but last April I felt that ethereum was a good speculation. It had incredible momentum, having risen 10-fold in the previous year, and the macro environment was strong as well: the economy was starting to boom as the pandemic eased, inflation and interest rates were low, and the stock market was ripping.

As I wrote in Empire Stock Investor last April:

Most [cryptocurrencies], no doubt, will end up worthless. But it's also become clear to me that some – bitcoin and a few others – have reached a critical mass in which enough people believe in them that their values are more likely to go up than down.

As I often say, here at Empire Financial Research, we aren't value investors or growth investors. We're make-money investors.

Today, ethereum isn't nearly as good of a speculation, for three main reasons...

First, its price momentum is now completely in the wrong direction, having fallen nearly 60% from its peak six months ago. Normally, when investing, if the price of something falls, it becomes more attractive – who wouldn't rather buy a dollar bill for 60 cents instead of 80 cents?

But when speculating – when it's impossible to value something and you're mostly just hoping someone comes along after you and buys it from you at a higher price – you want price momentum.

Second, the macro environment has also gone in the wrong direction. An overheated economy, supply chain bottlenecks, and the war in Ukraine have sent inflation to 40-year highs. To tame it, the Fed is raising interest rates, which has triggered a stock market plunge... and a full-blown crash among speculative assets of all types.

Lastly, yesterday the crypto markets experienced what we might look back on as a "Lehman Moment" – a term that refers to the day storied investment bank Lehman Brothers filed for bankruptcy on September 15, 2008. It sent shock waves through the global financial system, both because of Lehman's size and numerous counterparties, but also psychologically, as investors realized the government wasn't going to rush in to save them.

On that day, the S&P 500 Index closed down 4.8%, bringing its losses to 23% from its peak 11 months earlier. The many buyers then probably figured the sell-off was overdone... but it was just getting started. Over the next six months, the index fell an additional 43%.

Starting on Monday evening, TerraUSD (also known as "UST") – the third-largest "stablecoin" used by crypto investors, whose value is supposed to be pegged to $1 – "broke the buck" and has been trading wildly ever since, at one point hitting a low around $0.30 yesterday. Its affiliated cryptocurrency, Luna, which peaked at $119 last month, giving it a $40 billion market cap, collapsed by 95% yesterday and another 99% overnight (the last I checked, it was below $0.02!). You just don't see this very often, even in the nutty crypto world... (For insightful commentary on what happened, see Bloomberg columnist Matt Levine's last two missives: Another Algorithmic Stablecoin Isn't and Terra Flops.)     

The Terra/Luna collapse has triggered steep declines in nearly all cryptocurrencies and related assets.

Is this the beginning of a much bigger decline? Who knows...

But the odds of a very bad outcome have clearly risen quite a bit, so my spidey sense is telling me that it's time to get out and wait for another time to rejoin the game.

(To learn about a useful tool I highly recommend to help guide your sell decisions, please join me for a special event I'm hosting called "The Coming Inflation Shock of 2022" on Tuesday, May 17, at 8 p.m. Eastern time. It's free to attend, but you must reserve a spot in advance – you can do so here.)

2) For more aggressive investors with crypto accounts (alas, I don't have one), both TerraUSD and the largest stablecoin, Tether, are two of the best shorts I've ever seen – yes, even better than Digital World Acquisition (DWAC).

This morning as I wrote this, TerraUSD was still trading at $0.63, which makes no sense. There are no underlying assets – its value depends solely on investor confidence, which is now shattered, as it has broken the buck and Luna is worthless. I confidently predict TerraUSD will soon be as well.

Tether, in contrast, is supposedly fully backed by reserves. And if you believe that, please contact me as I have a bridge in Brooklyn for sale...

I've written extensively about Tether – here are links:

I don't doubt that Tether has some reserves, so it's less likely to implode than TerraUSD. But it broke the buck this morning – trading down to $0.95, before rebounding to $0.99.

But it's an almost perfect short because it can't trade above $1, so if you short it at $0.99, you can make 99% but the most you can lose is 1% (plus you'll have to pay de minimis 6% to 12% annual interest).

3) While I'm super bearish on the crypto sector, I'm starting to buy things I can value – the beaten-down stocks of real businesses that generate real cash flows.

Unfortunately, to prevent conflicts of interest, we at Empire Financial Research aren't able to own in our personal accounts anything we've recommended in our newsletters, so I can't buy my absolute favorite ideas, which include Berkshire Hathaway (BRK-B), Alphabet (GOOGL), Meta Platforms (FB), Amazon (AMZN), and Netflix (NFLX).

Yesterday and this morning, however, I did buy an exchange-traded fund ("ETF") that holds many big-cap Internet stocks, an online payments giant, a leading retailer, and a basket of four large bank stocks.

4) This is a funny tweet about Chamath Palihapitiya, the self-proclaimed (at the top of the bubble, of course) "next Warren Buffett," on whom I've heaped much well-deserved scorn (most recently in my April 12 e-mail):

Best regards,


P.S. I welcome your feedback at [email protected].