By Megan Horneman. © Verdence Capital Advisors
I was in line at my local Eddie’s grocery store when I had to laugh out loud. On the magazine rack was the most recent copy of New York magazine. The title read, “Can I SPAC my STONKS with NFTs?” I am not sure if the question was what was amusing to me or if it was the subtitle which read, “…and Other Reasonable Questions About the New World of Money.” After reading the article it seemed like the subtitle was satirical journalism at its best. Any reasonable investor would know there is nothing reasonable about what we are witnessing in this new world of speculation.
I thought the time of the unprecedented and the unimaginable was behind us after we rang in 2021. However, some of these speculative investments that have become a hot topic for social media sites are mind-boggling. What we would like to do is educate you on some of the new acronyms and speculative investments that are gaining attention and remind investors that we do not believe they have a purpose in any RESPONSIBLE long-term investor’s account.
- What is a STONK? The word “stonk” gained attention on Reddit, a site that has featured many speculative investment trades. It was meant to be humorous and was jargon for the MEME
stocks (e.g., GameStop, AMC Entertainment) that have led to speculative gains but also significant losses for internet followers. It is a play on the word “stock.” Taking out the “c” and adding an “n.” It is meant for the stocks that have no fundamental reason to buy them but just because everyone else is from a tip on the internet, there is a misperception that you do not want to miss out.
- What is an NFT? It stands for non-fungible token. NFTs use the same blockchain technology as Bitcoin. It is proof of ownership of a digital asset such as digital art or a video. Proof of ownership is stored in the anonymous online ledger, like Bitcoin. NFTs can not be exchanged for anything, they are unique, like art. It gained attention when a digital piece of art was auctioned at Christie’s for nearly $70 million. If you purchase the digital file, you get limited rights to show the image, but you do not get copyright or trademark privileges. Meaning you own the rights to the image but not the actual image. In addition, transacting NFTs carries heavy fees, and your dollars typically need to be converted to Ethereum or other cryptocurrencies. You are transacting in an inefficient market for something you will not physically own. Think about it, it is digital and often alive on the internet. It can be replicated by the click of a download. So, what are you buying? Some say, “bragging rights.”*
- What is a SPAC? A SPAC stands for Special Purpose Acquisition Company. It is a shell company that raises money from investors with the intention to find other valuable companies to take public through an IPO. The investor puts money into the SPAC, but they do not know what company the SPAC will buy or when the investment will take place. Investors are simply taking a bet on the management team. We would be cautious investing in this space. Its allure is driven by celebrity names, many of whom have little to no investing experience. In addition, investors are taking a bet that an attractive company will appear and if one does not there is an opportunity lost as you have tied up money that may have earned more elsewhere (e.g., traditional private equity). We have seen the risk in this space when too much speculative money is chasing too few quality investments. In fact, last month (March ’21) the SPAC Index fell into bear market territory.
- What is Dogecoin? Dogecoin is a cryptocurrency that came out as a joke in 2013. It was originally used to reward people who posted tips on social media websites like Reddit. In contrast to Bitcoin, there is no set number of coins that can be mined. It has gained more than 7000% in 2021 so speculators are intrigued. In the end, it is a cryptocurrency with the same if not more risks as bitcoin.
The Bottom Line:
It is not surprising that with the explosion in the money supply and historically low interest rates that investors are seeking nontraditional ways to gain return. Excess liquidity is fueling speculation, but it is dangerous to fall victim to the fear of missing out. We have seen the volatility these investments carry with the sharp decline after Biden’s potential tax hikes. In addition, as more of these nontraditional investments gain attention from lawmakers regulation is likely to emerge and threaten the speculative craze.
Footnotes: *bpr.org, “What’s an NFT? And Why are People Paying Millions to Buy Them?
This material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice.
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By Megan Horneman