Hedge Funds Pile Into Initial Coin Offerings

Posted On Aug 31, 2017 By Dave Gonigam

  • It was inevitable: Here come the crypto hedge funds
  • Uber IPO: What if the company is really a zero?
  • Gold perks up on weak inflation (you read that right)
  • Will Buffett change his tune with the latest Wells Fargo fiasco?
  • India’s cash ban declared a “failure” — or is it?

“Like wild mushrooms, crypto hedge funds have been taking root in the volatile and unregulated soil of the crypto economy,” says a report out this week from the research firm Autonomous NEXT.

The firm has identified 55 cryptocurrency hedge funds now up and running. They generally fall into three categories. “The first comes in a traditional regulated hedge fund structure which happens to be buying up cryptocurrencies. Think macro or technical Wall Street traders.”

The other two specialize in initial coin offerings — the ICOs that are comparable to an initial public offering of a stock. “There are early-stage funds that look like liquid venture capital. They target pre-ICO investments through community access, and can then quickly make a return once the token is trading. And last, we see a number of funds using the ICO structure itself to create decentralized investment management products (i.e., indexes, baskets, ICOs of ICOs).”

The report affirms what our own Louis Basenese has been saying all summer. “A marquee venture capitalist just left his post at Union Square to invest solely in crypto assets. He’s reportedly secured $100 million worth of investor funds to launch his initiative.

“This is only the beginning, though,” Lou hastens to add.

“Based on our early research, at least 15 more crypto hedge funds will launch before the end of the year. Especially since one of the first cryptocurrency hedge funds is allegedly up 2,129% so far this year.”

Of course, you don’t have to be a big-bucks “accredited investor” with access to a hedge fund to collect sizeable ICO gains. But — to play off the mushroom analogy here — you have to know which are nourishing to your wealth, and which are poisonous.

As you might already be aware (because we kept reminding you), a first-of-its-kind cryptocurrency came into being on Monday. Lou is especially keen on this one. He believes its profit potential could be 1,000 times those of bitcoin, ethereum and all the others — combined.

“So far, the ICO has gone very well,” Lou says, three days in.

Remarkably, there’s still a chance to get in on the ground floor. But time really is of the essence right now; only a few hours remain in which you can gain “backdoor” access to our exclusive research on this historic ICO opportunity. Here’s the link: Be advised the link will be dead after midnight tonight.

Stocks are rallying amid thin volume on this next-to-last day of the summer trading season between Memorial Day and Labor Day. The Dow is back within 50 points of 22,000.

Crude is finally staging a post-Harvey rally, a barrel of West Texas Intermediate up more than 2.75%, to $47.24. Gasoline futures are up another 11%, to their highest in more than two years after word that the biggest U.S. refinery — owned by Saudi-held Motiva Enterprises — might be shut down for two weeks.

Gold is rallying as traders sniff out the prospect of the Federal Reserve “easing” policy for the rest of the year — about which more below — and the bid is up to $1,316.

Elsewhere, trader chatter is about the new CEO at Uber — he came from Expedia — and his big talk about taking the company public as early as 2019.

“The probability of [Uber] going bankrupt in a decade is 99%,” says Hamish Douglass, co-founder of the Australian wealth manager Magellan Financial Group.

In light of the news, today’s as good a day as any for The 5 to give voice to a couple of financial renegades who’ve analyzed the publicly available numbers about Uber… and concluded there’s no there there.

In doing so, they’re taking considerable career risk: Uber, after all, is touted as a decacorn — a privately held company valued over $10 billion — because it’s about as singular as a mythical creature (with an additional nine horns). Uber’s value today is $69 billion… so it earns its moniker by a long shot, right?

Douglass believes that value is likewise mythical. “It’s constantly losing money, and its capital-raising strategy is a Ponzi scheme,” he said at a conference in May. “All they do is keep increasing their private-market valuation, and someone always says, I’ll put some money up, because next time they raise, it’ll be at a higher price.”

“Many other tech startups lost money as they pursued growth and market share, but losses of this magnitude are unprecedented,” adds Hubert Horan.

Mr. Horan is a veteran consultant to the transportation industry. Late last year he questioned Uber’s profitability and sustainability in a 39,000-word series of posts at the Naked Capitalism website. His conclusion: All those inexpensive rides are effectively subsidized by gullible venture capitalists who keep pouring money into the company.

By Horan’s reckoning, Uber has racked up losses of about $2 billion every year from 2012–16. Its profit margin is minus 149%.

How does that compare with legendary startups of the past? “In its worst-ever four quarters, in 2000,” he writes, “Amazon had a negative 50% margin, losing $1.4 billion on $2.8 billion in revenue.”

Meanwhile, “2015 was Uber’s fifth year of operations; at that point in its history Facebook was achieving 25% profit margins.”

As Horan figures it, Uber subsidizes each fare up to 61% — drawing on its coffers stuffed with nearly $13 billion in venture capital. Supposedly, after it crushes all competition from the likes of Lyft, Uber will then raise fares and keep its corner on the market. Sweet, huh?

Again, these experts are working off limited information; because Uber is not public, it can limit the numbers it discloses. If the new CEO is serious about an IPO, we will learn in the fullness of time whether these rebels are right. Stay tuned…

If there were any lingering question about whether the Federal Reserve would raise interest rates again this year, the latest inflation numbers just put them to rest.

The Commerce Department is out this morning with “core PCE” — the Fed’s preferred measure of inflation. When the Fed talks about its 2% inflation target, this is the figure it has in mind. The number got *this* close to the target last year… but the new number confirms a six-month slide from 1.9% to 1.4%…

chart

So much for a December rate increase — which Jim Rickards has been saying for weeks is a dead letter. Even if the core PCE number starts to reverse, Jim says Fed chair Janet Yellen “does not change policy on one month’s data. She likes to see three–six months of data before deciding that a new trend is in place.”

But Jim doesn’t expect that number to reverse — which means more dollar weakness and more gold strength going into year-end…

Fun with forensic accounting: Wells Fargo just discovered another 1.4 million bogus accounts it opened without its customers’ knowledge or consent.

These are accounts dating to roughly 2009–2011… on top of the 2.1 million we already knew about from 2011–15. And the bank skimmed fees and charges from about 190,000 of them — up to $39 a month.

Cue the faux-outrage machine…

Jim Cramer tweet


Really, Mr. Cramer? Why now and not before?

As for the future of the board members, that gets decided at WFC’s shareholder meeting next year. At the last one in April — documented here in The 5 — Warren Buffett’s Berkshire Hathaway used the power of its 10% stake in Wells Fargo to retain all the existing directors, even though the scandal had been news for months. At this stage, we expect an identical outcome next time…

Now for a “progress” report, if that’s what you want to call it, about India’s brazen cash ban.

As we mentioned at the time, last November Prime Minister Narendra Modi banned the country’s most common bank notes — roughly equal to $10s and $20s in the United States. Indians were required to bring their cash to a bank, where it could be deposited in a digital account or converted to other denominations. Chaos ensued for weeks; in some places, money riots broke out.

The Indian government’s stated rationale was to flush out “black money” that escaped taxation in the country’s mostly cash-based economy.

Judging by a new report from India’s central bank, the effort is “a failure of epic proportions,” says economist Vivek Kaul, writing at the BBC’s website.

The Reserve Bank of India finds that 99% of the banned cash — $242 billion worth — was returned to the banks. That wasn’t how it was supposed to work, we’re told; the idea was that people who earned their cash without paying taxes on it would be afraid to exchange that cash and the “black money” would be rendered worthless.

That said, was the exercise really a failure?

As another economist tells the Reuters newswire, “While this shows that the demonetization exercise has not yielded a large one-time gain, it has led to financialization of dormant savings and helped bring down lending rates.”

Ah yes, “financialization of dormant savings.” That is, it’s no longer sitting inside cookie jars and under mattresses, but in the banks — which will find no shortage of things to do with it. Too, the exercise spurred many Indians to acquire cheap smartphones and begin conducting their transactions in the digital realm — where they can be more easily tracked and taxed.

All told, it’s still been a valuable test case for global elites; as we mentioned in January, the journalist Norbert Haering uncovered documentary evidence that the scheme was hatched in part at USAID — the U.S. Agency for International Development.

It was shock therapy applied to the world’s second-most-populous country and seventh-largest economy. And it “worked” splendidly in that despite all the disruption, the party of Prime Minister Modi easily won regional elections last spring.

“I think you evaded the comment about cash being essential in Houston,” a reader writes after yesterday’s episode.

“Cashless transactions depend on reliable network connections. In an emergency like exists in parts of Texas right now, such connections do not exist or are unreliable. Thus, cash or barter become the only practical means of transactions.

“This should be a warning to those who advocate eliminating cash. As long as everything works as it should, then eliminating cash is probably workable, but when TSHTF the emergency will be severely compounded if the people have no way to make and accept payments.

“Cash is also a form of infrastructure, and we eliminate it at our peril.”

The 5: You think the powers that be give a flying leap?

Do you really think the public intellectuals who’ve been waging the War on Cash with the most passion — like former Treasury Secretary Larry Summers and Harvard economist Ken Rogoff — are making that connection?

If anything, such events would play into the elites’ hands. Can you think of a better way to make people utterly dependent on government than to deprive them of physical cash amid a widespread natural disaster? It’s a central planner’s dream. “Yes, sir, your family can have three extra rations of MREs this week. However, you will have to surrender all firearms in the household.”

Of course, in the absence of cash this week all of metro Houston would have turned into something resembling the Louisiana Superdome after Katrina… but again, where’s the downside for the elites?

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Last chance: If you missed out on Lou Basenese’s revolutionary — and potentially life-changing — “ICO” research, there’s one last shot at “backdoor” access. But it’s available only through midnight tonight. Here’s where to find it. (And there’s still no long video to watch!)


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