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ApeCoin Is the Cryptocurrency America Deserves

ApeCoin Is the Cryptocurrency America Deserves

This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.

Did Blade Runner Predict ApeCoin?

As Ridley Scott’s 1982 sci-fi classic turns 40, I can’t help but wonder: “How close did Blade Runner get to predicting the future?”

On one hand, the movie overestimated the speed of some technological progress. Sentient artificial intelligence remains years away, we haven’t colonized other planets and I’m still waiting on my flying car (paint mine red, please).

But on the other hand, the film got many things right — and not just casting Harrison Ford, who still looks great forty years later. Worries about the environment… inequality… privacy… have all come to light.

The smog-filled 2019 world of Blade Runner looks eerily similar to the American West during wildfire season, and the growing centralization of tech giants is starting to look a bit too much like the corporate-run dystopia of Philip K. Dick’s imagined world. Let’s just hope the original book is wrong about global nuclear conflict.

However, for all Blade Runner predicted about the rise of corporate power and inequality, it did miss its potential impact on the financial system. No corporate-run currencies feature in the film; Mr. Ford’s character still pays US dollars to make a phone call. And bounties are paid in hard currency, rather than some Shiba-themed tender.

Mr. Scott still has a chance to correct this in an upcoming TV series sequel, Blade Runner 2099 (unironically sponsored by Amazon (NASDAQ:AMZN)). As tech companies expand their influence over the financial system, our image of a dystopian future will soon include centralized cryptocurrencies and other corporate-sponsored finance.

In the early nineteenth century, European diplomat Joseph de Maistre noted that “in a democracy, people get the leaders they deserve.” In a laissez-faire market like ours, the same can be said about the cryptocurrencies we’ve got today.

An illustration of a monkey in an astronaut suit with a cheeky facial expression.

Source: Catalyst Labs / Shutterstock.com

ApeCoin and the Meme Economy

Last week, meme cryptocurrency ApeCoin (APE-USD) became the world’s most valuable metaverse coin.

“Otherside doesn’t take cash, credit, or checks,” the Bored Ape Yacht Club’s (BAYC) team said of its upcoming Metaverse project. “The economy here runs on ApeCoin. Should you aim to purchase an item in Otherside, it’s APE you’ll need.”

The news sent ApeCoin soaring to a $26 billion valuation in a short-lived celebration. But by the end of the mania, $12 billion of investor wealth had been wiped out as the coin tumbled back to earth.

Such moves reflect the “hands-off” attitude increasingly popular among Americans. A 2021 Pew survey found that only 37% of U.S. adults supported government-led reductions in the size of major tech companies. And the latest Gallup Mood of the Nation poll finds the number of Americans who want less government regulation now outnumbers those who want more by a 1.6-to-1 ratio.

These views have led to unintended consequences. Since 2021, the number of tokens on the Binance Smart Chain — most of which serve no discernable purpose — has ballooned from several thousand to over two million. And a whole ecosystem of crypto “shadow banking” facilitates everything from unregulated lending to leveraged stock trading.

Scams have likewise proliferated. Even as significant crypto exchanges tighten up on “know your customer” rules, crypto tumblers like Tornado.cash have made it even simpler to launder stolen cryptocurrency.

A Light Touch

Many of these phenomena can be traced back to lax tech regulation.

With the notable exception of Microsoft in 2001, the decline in trust-busting appetite during the late 1970s has allowed tech giants to dominate the modern day economy. Today, the top 5 tech firms compromise 20% of the S&P 500, up from 12% a decade ago. Heavily-regulated industries from banking (fintech) to healthcare (telehealth) have also been upended by a parallel industry of unregulated tech startups.

These same forces have also allowed cryptocurrencies to develop in a “Wild West” environment. Lacking any regulatory oversight, ApeCoin’s corporate governance has become an even more questionable version of the variable interest entities (VIEs) that Chinese companies use to trade on American stock exchanges (The Ape Foundation even has a Caymans-based consulting firm on its payroll and governance team).

Close to 75% of ApeCoin’s governance tokens remain with insiders, a fact not lost on critics at The Verge:

“The people who actually run the Ape Foundation, on a day-to-day basis, are the board members and the Cartan Group — which, I mean, is not exactly decentralized or autonomous. Maybe ApeCoin is just an O, not a DAO.”

Going Ape Over ApeCoin

The second contributing factor is the growing visibility between the “haves” and “have-nots” in American society. Thanks to social media and the ease of displaying wealth online, this “new aristocracy” has become more visible than ever.

And what about people who don’t feel like toting around a designer tote bag everywhere they go? You can now post your hundred-thousand-dollar Yacht Club NFTs as your Twitter (NYSE:TWTR) profile picture for the world to see.

Meanwhile, many “merely wealthy” folks are no longer content with buying cheap and cheerful Mazda Miatas. Instead, an entire generation of Reddit-based investors are snapping up bets like AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME), status symbols in a plethora of social media echo chambers.

As an avid market participant and finance writer, I’ve been in a unique position to witness these events. Over the past several years, my coverage has shifted from cheap tech stocks like Nokia (NYSE:NOK) to those speculative bets that retail investors have found themselves peer-pressured into buying.

Sometimes, these echo chambers root out lasting winners. Much like those who bought collectible Porsche 993s in the 1990s, those purchasing actually useful coins like Ethereum (ETH-USD) and Terra Luna (LUNA-USD) are sitting on high-quality gains. Even when covering the abundance of riskier bets in the crypto space, I’ve focused my attention on these assets that provide obvious economic value.

But other times, the crowd fixates on cheap knockoffs. And while plays like SafeMoon (SAFEMOON-USD) and Bitcoin (BTC-USD) miner SOS Limited (NYSE:SOS) can certainly remain popular for a while, their lack of quality eventually catches up to them (Not that a sell recommendation ever gets through to the most diehard fans).

And what of the Bored Ape ecosystem? Though many early investors have become multi-millionaires, the collection of “ugly illustrations of primates” — as writers at Polygon put it — still resembles a zero-sum game rather than a source of long term profits.

Getting What We Deserve

Finally, younger people are taking more significant investment risks than ever.

A 2021 study by British asset management firm Schroders found that “a significant portion of people are taking on more risk in pursuit of returns in the wake of the pandemic.”

Financial data further supports the claim. According to records from the Options Clearing Corp, options trading reached a record 9.87 billion contracts in 2021, a 32% increase from the year before.

Much of the growth comes from Robinhood (NASDAQ:HOOD) and other next-generation trading platforms. Rather than subjecting investors to strict permission guidelines for options trading, these upstarts allow young investors to start swapping volatile financial derivatives within minutes of finishing a brief survey.

The ease of risk-taking has also extended to cryptocurrencies, particularly in Decentralized Finance (DeFi). P2P trading platform BitMEX allows up to 100x leverage on Bitcoin contracts, and some lenders are even offering crypto mortgages for digital Metaverse properties.

But the risk-taking also reflects a growing desperation among younger generations.

In 1990, Baby Boomers — who averaged 35 years old at the time — owned around 20% of American wealth. The average house cost 2.7x the median salary.

Fast forward to 2022, and the same 35-year-old cohort of Millennials now own less than 4% of American wealth; houses cost over 6x the median salary.

It’s also become harder than ever for young investors to catch up. Since the 2009 financial crisis, the inflation-indexed yield on 10-year bonds has remained below pre-crisis 2% levels — a fact that impacts longer-horizon investors more than shorter-term ones. As the Schroders report also noted, “0% or negative interest rates incentivise riskier investment behaviour.”

Many attempts to catch up end in disaster — one particular story featured in the New York Times profiled a young investor who suffered an $860,000 loss in options during a Robinhood outage in March. Countless others have become victims of rug pull scams. In a world where anonymous crypto founders can raise millions with zero oversight, there’s plenty of incentive to walk away with the cash rather than put in the promised work afterward.

The U.S. Justice Department is belatedly starting to crack down. In March, the DOJ charged two 20-year-olds over the Frosties NFT rug pull.

But these efforts won’t stem the tide. As penny stock investors know, listings beyond the SEC’s purview are filled with frauds, get-rich-quick schemes and unscrupulous managers.

Should You Buy ApeCoin?

“Rising interest rates have crushed risky bets across the financial markets — and NFTs are among the most speculative,” reporters at Wall Street Journal dryly observed this week. “Many NFT owners are finding their investments are worth significantly less than when they bought them.”

The same can be said for ApeCoin — an asset with no earnings and no dividends. Yuga Labs has yet to allow staking, and even those returns are often questionable at best.

Many investors will flock to ApeCoin anyway. Much like AMC shares on Reddit’s r/WallStreetBets, ApeCoins are a defacto cover charge for entering the Bored Ape club. And many rightly ask: Why invest in a dull cryptocurrency like Ethereum when you can own a piece of what Justin Bieber just bought?

In truth, some will get rich, especially those arbitraging the token across multiple platforms. DeFi has sent us back to the 1920s, where the same asset can trade for different prices across various exchanges. And the BAYC ecosystem may yet evolve into a productive gaming or entertainment firm.

But unless you’re a high-frequency trader or the owners of Yuga Labs, ApeCoin today remains a zero-sum wealth transfer from one pocket to another. You might get rich from buying and holding, but gains must eventually come from someone else.

P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at [email protected] or connect with me on LinkedIn and let me know what you’d like to see.

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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.