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Carrying a Cat by the Tail

December 2022

The great American writer Samuel L. Clemens, better known by his pen name, Mark Twain, once wrote, “A man who carries a cat by the tail learns something he can learn in no other way.” Over the past several months, I have found myself thinking of this quote frequently as I watch the daily carnage in the cryptocurrency markets.

You see, for years, the crypto believers have informed, at times pressured, and occasionally even shamed the non-believers (like me) into getting aboard their fast-moving train. I have been told that cryptocurrency offers numerous benefits over the old-fashioned means of exchange. “It’s a hedge against inflation!” “International transactions can be done seamlessly!” “The government can’t monitor your transactions!” Certainly, there are scores of additional benefits, but this newsletter is physically incapable of capturing them all.

Despite these attributes, I avoided owning the asset class as it reminded me of a cat I once grabbed by the tail. The year was 1998 and I had just graduated from college to start my first job as a lowly first-year investment banking analyst. My job was to assist those who actually knew something about equity underwritings, mergers, and acquisitions. I had been an avid stock investor for roughly a decade at that time, having become mesmerized after quickly doubling my lawn mowing money in my first stock at the age of 11 (a story for another time…).

Each day in the office, I giggled, along with my fellow analysts, at the newly minted profits that populated our investment accounts. It seemed too good to be true, but the adults in the room were not acting much different. Our deal flow at the company was soaring and the senior bankers frequently spoke of anticipated outlandish bonuses as our client list swelled with the likes of internet service providers and e-commerce companies. Of course, there was business from our long-time clients as well, but that did not seem nearly as exciting to a young, impressionable worker like me, perhaps because the financial media had clearly divided the business world into “old economy” and “new economy” companies. Old economy companies were uninteresting and generally filled with asbestos. New economy companies were innovative and filled with stock options. It was not hard to figure out where you wanted to spend your time.

Here Kitty Kitty…

Companies with little in the way of operating history, less in the way of revenue and lots in the way of negative profits suddenly garnered billion-dollar market capitalizations. Fed Chairman Alan Greenspan spoke of “irrational exuberance” as a low interest rate environment powered global markets to all-time highs. Suddenly, everyone knew someone who quit their full-time job to become a day trader (because managing one’s personal portfolio was more profitable than toiling away at work, obviously). Riches were to be found everywhere — all you needed to do was buy some of those “.com” stocks. I did just that with my first-year bonus, putting most of it into Ciena Corporation, a provider of fiber optic equipment that was bound to grow as the world’s need for bandwidth was unfathomable. One year later, the stock was up 500% from my purchase. I distinctly remember sitting at the kitchen table with my new bride discussing our biggest financial decision to date: Should we pay off my student loans with these profits, or let it ride? That was February 2000.

What happened from there? Well, as the kids say, “If you know, you know.” From March 2000 to October 2002, the NASDAQ Composite Index proceeded to lose approximately 80% of its value. Millions of retirement accounts were damaged, some irreparably so. A recession followed and many of the “new economy” companies vanished, while the number of day traders declined precipitously. As for myself, I had many investments that plummeted — one of which went all the way to zero. I vowed, there and then, to never get wrapped up in an investment frenzy again. I have even kept the $0.01 stub position from the now bankrupt Turnstone Systems in my Fidelity account as a reminder. Fortunately, Ciena was not one of those positions that sank into the abyss. We sold it in February 2000 and paid off all my school loans. Timing is everything in life, and better decision making is a valuable, yet undersold, benefit that often comes with the institute of marriage.

Cat-Scratch Fever

Fast forward almost two decades and the cryptocurrency revolution was upon us! Day trading savants appeared again, quickly turning profits in currencies such as Dogecoin, Polkadot and Litecoin. Celebrities began promoting their digital asset investments to the masses. (If Brady can win six Super Bowls, then certainly he can trade currencies, right?) Sports arenas were renamed in sponsorship deals with cryptocurrency exchanges. Some left their jobs to go work at crypto-related firms. Both the financial media and crypto believers needed you to know that you were missing out. Riches were there for the taking — again, all you needed to do was pick a coin of choice and watch it skyrocket.

Interesting as it all was, it looked a lot like a cat I had once carried by the tail, and true to Twain’s wise words, I had learned my lesson and wanted no part of repeating the experience.

The crypto believer would argue that I am a dinosaur who just does not get it. Despite my tone throughout this letter, I am a believer that digital currencies are here to stay. The blockchain technology that serves as the foundation of bitcoin and other digital currencies has too many advantages in terms of security and accessibility to simply go away. However, a disruptive concept or technology does not always translate into a successful investment. Just look at the internet, which turned out to be every bit as impactful as the early believers suggested. Despite the internet revolutionizing business and communication, the NASDAQ took 15 YEARS to regain its highs established in March of 2000!

Mania, no matter the form, always carries significant risk. Whether tech stocks in the 90s, gold a decade ago or cryptocurrencies today, if your neighbor is quitting their job to trade it, or financial news networks are airing commercials for how you can get it, you typically want to run the other way — far, far away.

There is likely more pain to come in the cryptocurrency saga. It is hard to imagine that the collapse of a coin like Terra Luna, or an exchange like FTX, are one-off events. Having worked in the investment field for my entire career, I believe it is highly likely that many institutional investors are in the process of liquidating their digital assets and hitting a long pause on future investments. Good and bad investments happen, but investments that are mentioned in the same sentence with the word “fraud” are unacceptable. As money comes out of digital currencies, the stress on the exchanges, the coins, the investment funds, the investors, etc. all increases. Often times, that is when things “break.”

And so, a new generation will learn lessons about carrying cats around by their tails that prior generations learned themselves in tech stocks, commodities or real estate. It would be less trouble if we could all take the advice of those who have traveled the road before and avoid the dangers that await. Apparently though, we humans prefer to experience it for ourselves. I guess the trick is to make it a small cat if you are going to pick one up, and only do it once.

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