Insights
10,000% return from 'joke' cryptocurrency

The market value of Dogecoin, a cryptocurrency, hit US$100 billion (NZ$137b) last week.

That’s only a surprise when you consider Dogecoin was set up as a joke, and its creators are dumbfounded by its popularity.

As an investment this year Dogecoin is remarkable, returning over 10,000 per cent.

People may buy it for fun, or simply because they think someone else will pay more for it tomorrow.

While Bitcoin has some real world uses, you can’t do much with Dogecoin.

Its intrinsic value should be close to zero, yet at US$100 billion its market value is twice the combined worth of Fisher & Paykel Healthcare, Auckland Airport, Meridian Energy and Fletcher Building.

Has the world gone mad?

What Dogecoin is for cryptocurrency, Gamestop is for listed shares.

Hordes of investors loosely connected through social media have sent Gamestop’s share price surging 850 per cent this year.

Unlike Dogecoin, buying Gamestop has some logic.

Large hedge funds are “short” Gamestop shares, meaning they have sold shares they don’t own. If owning shares is like having money in a bank account, then they’ve overdrawn their bank account.

At some point those hedge funds need to buy back the shares, essentially to cover their ‘overdraft’, so as the share price rockets skyward they are facing truly massive losses.

Gamestop owns retail gaming stores like the EB Games chain in New Zealand, but you’d be hard-pressed to find anyone who thinks the underlying business is worth its US$16b market value.

Investors may buy it partly for fun, to cause hedge funds real pain, and partly to make money by selling to someone who will pay more tomorrow.

There are similarities with Dogecoin.

More evidence of market madness is the phenomenal rise in US cash box companies called ‘SPACs’, which stands for Special Purpose Acquisition Company.

These companies raise cash from investors, and list on the stock exchange, without having confirmed an investment.

Some cool companies are bought by SPACs, like Rocket Lab, which was founded in New Zealand, and Virgin Galactic.

But the risk is a SPAC sits on the cash for a long time or makes a poor investment.

While many SPACs have lost money, they raised over US$100b in 2020 and a further US$20b this year. So in just over a year, these listed cash boxes with no firm plans to buy a business have raised more than the market value of ANZ Bank, Spark, Mainfreight and Ryman Healthcare combined.

Is this mad?

It’s not hard to find cases of market madness like Dogecoin, Gamestop and the explosion of SPACs.

But the underlying cause of this market madness might be in the very foundations of the world’s economic system.

Interest rates globally are suppressed to incredibly low levels. Central banks continue printing vast amounts of money. In his short stint as leader of the US, President Biden has already signed off on a massive US$2.5 trillion of stimulus spending.

With meme stocks, Dogecoin, SPACs and trillions of dollars of money printing it can be hard in 2021 to define where economic reality starts and stops.

Its intrinsic value should be close to zero, yet at US$100 billion its market value is twice the combined worth of Fisher & Paykel Healthcare, Auckland Airport, Meridian Energy and Fletcher Building.

What Dogecoin is for cryptocurrency, Gamestop is for listed shares.

Hordes of investors loosely connected through social media have sent Gamestop’s share price surging 850 per cent this year.

Unlike Dogecoin, buying Gamestop has some logic.

Large hedge funds are “short” Gamestop shares, meaning they have sold shares they don’t own. If owning shares is like having money in a bank account, then they’ve overdrawn their bank account.

At some point those hedge funds need to buy back the shares, essentially to cover their ‘overdraft’, so as the share price rockets skyward they are facing truly massive losses.

One in the eye for the money men: Followers of YouTube personality Roaring Kitty, inspired by his enthusiasm for buying stock in the underdog retailer GameStop, made him an icon in the social media frenzy that shocked Wall Street.

Gamestop owns retail gaming stores like the EB Games chain in New Zealand, but you’d be hard-pressed to find anyone who thinks the underlying business is worth its US$16b market value.

Investors may buy it partly for fun, to cause hedge funds real pain, and partly to make money by selling to someone who will pay more tomorrow.

There are similarities with Dogecoin.

More evidence of market madness is the phenomenal rise in US cash box companies called ‘SPACs’, which stands for Special Purpose Acquisition Company.

These companies raise cash from investors, and list on the stock exchange, without having confirmed an investment.

Some cool companies are bought by SPACs, like Rocket Lab, which was founded in New Zealand, and Virgin Galactic.

But the risk is a SPAC sits on the cash for a long time or makes a poor investment.

While many SPACs have lost money, they raised over US$100b in 2020 and a further US$20b this year. So in just over a year, these listed cash boxes with no firm plans to buy a business have raised more than the market value of ANZ Bank, Spark, Mainfreight and Ryman Healthcare combined.

Is this mad?

It’s not hard to find cases of market madness like Dogecoin, Gamestop and the explosion of SPACs.

But the underlying cause of this market madness might be in the very foundations of the world’s economic system.

Interest rates globally are suppressed to incredibly low levels. Central banks continue printing vast amounts of money. In his short stint as leader of the US, President Biden has already signed off on a massive US$2.5 trillion of stimulus spending.

With meme stocks, Dogecoin, SPACs and trillions of dollars of money printing it can be hard in 2021 to define where economic reality starts and stops.

Even locally our residential property market has raced higher despite a universal belief Covid-19 would send prices down. Market madness.

What could possibly come next?

- John Berry is the Chief Executive at ethical fund manager and KiwiSaver provider Pathfinder Asset Management, which is part of Alvarium Wealth. Monday Thoughts was originally published by Stuff Media May 10, 2021.