Bumbling Bubbles: SPACs Crypto and the Moon

If you think the market is hot today, wait until the economy reopens. Consumers are forced to spend money inside. Literally as outdoor dining continues to be restricted in parts of America.

Crypto Chasers

The cryptocurrency wave is back. In three months, the price of one Bitcoin has gone from $16,000 to $48,000. This is not by chance. Retail investors are excited again about the next big thing. But this time they are backed by institutional investors.

Macro play, MicroStrategy

The bitcoin rally first began in the fall of last year. The U.S. election was the main catalyst for several investment ideas, including crypto. But this new upswing is thanks to Michael Saylor, the founder of MicroStrategy.

MicroStrategy is a $9 billion mobile intelligence, cloud software business. This publicly traded corp was founded in 1989 at MIT. Mike has seen a thing or two about booms and busts. In fact, Mike is an exceptional CEO. He built a fast growing tech company ten years before the dot-com bust and predicted the mobile technology wave in 2012. You can read more in his book, the Mobile Wave, discussing the future of mobile intelligence.

You must be wondering, what about crypto? Well Mike jumped feet first into this industry. In July 2020, he began searching for alternative cash investments for MicroStrategy. A month later he purchased $250 million worth of Bitcoin. By early December, he added another +$200 million in Bitcoin. Then decided to raise $650 million in debt to create a +$1 billion position in Bitcoin. And it gets better.

MicroStrategy’s average Bitcoin purchase price was $16,000. Mike maintains majority control of MicroStrategy so the buck stops with him. And at today’s price, he’s tripled his investment in six short months. Not bad for a tech evangelist. But wait, there’s more...

‘Dodge’ coin

Dogecoin is the infamous meme investment of 2021. This crypto was designed by two engineers as a joke to compete with other altcoins from 2013. The founders even made a cute Shibu Inu dog the mascot of this meme coin. Hard to believe a joke coin became a high returning asset in 2021. Now enters Elon Musk.

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Building a new rocketship

For the past two weeks, our meme lord has been posting about Dogecoin with no stake in crypto...until now. Elon’s Tesla has built a $1.5 billion position in Bitcoin over the last 30 days. This was not surprising if you were paying attention to Elon’s recent moves. Let’s dive into the several reasons why he did this.

Doge memes

First, Elon the Master of Avoiding Disaster, had #Bitcoin on his Twitter page for weeks. Elon is a first class internet troll so no one suspected he was buying crypto. In fact, he had been posting about Dogecoin for weeks. Between GameStonk and Doge memes, his fans were too busy laughing. So it caught everybody by surprise when he purchased $1.5 billion of Bitcoin. But his motives were clear.

The original fintech investor

Remember, Elon co-founded Paypal and sold it to eBay for $1.5 billion in 2002. He knows a thing or two about financial payments. He’s a technologist and engineer who wants to reduce friction in the world. Bitcoin can deliver on that.

Tesla’s intention is to accept Bitcoin as payment. Makes sense since more and more people are holding the currency. In fact, since Tesla has been building its Bitcoin position, the currency has moved from $35,000 to $48,000 in the last month. The company has delivered +$180 million in unrealized profits even as the auto company struggles to make a profit.

Not a bad way to begin 2021. And I think many more corporations will jump on the bandwagon next.

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Can’t stop, won’t stop, GameStop

I can’t conclude this segment without mentioning GameStop again. Remember even crypto millionaires can fall for the quick buck. Justin Sun, the founder of blockchain company Tron, lost over $8 million investing in GameStop and AMC at the market highs last month. This is the same kid who paid $4.6 million to have lunch with Warren Buffett.

But Justin is prepared to hold his losses to ‘support’ the movement. Hate to break it to him but he’s never making that money back.

Alright, now onto SPACs.

Hot SPACs raise billions

Hot off the press, more than 128 SPAC IPOs have taken place in 2021. It’s only been six weeks but $38 billion has been raised to acquire private companies. This number is larger than all the SPACs from 2019. The IPO market is hot, direct listings are becoming popular and everybody wants to SPAC.

Who’s writing Blank Checks

I know what you’re thinking. $38 billion is a lot of money. That is half of the SPAC money raised in 2020. So what’s the problem? Well for starters, there is too much dry powder in the system. This started when interest rates hit zero. And now the Federal Reserve has printed more than 20% of the total U.S. Dollars in 2020 alone. Inflation is around the corner when rates increase.

You see my point, right? We have too much cheap money in the system! And not enough deals. Everyone is chasing the same deals. Remember, SPACs are blank-check vehicles. Before they do a deal, you are betting on the SPAC manager to find a suitable target within a two year window. So you need to be cautious.

Back to the King of SPACs

Let’s begin with the trouble in the SPAC kingdom. The SPAC King, Chamath Palihapitiya has reserved every single IPO ticker from A to Z. Chamath plans to launch each of them. He strongly believes more companies need to go public, making SPACs the perfect vehicle. And he’s right. That’s why he’s a billionaire.

Chamath has six SPACs in the market so far. He’s taken four major brands public: SoFi, Virgin Galactic, OpenDoor, and Clover Health. He’s even funded the reverse merger IPO of Metromile, a new insurance company backed by Mark Cuban and Ryan Graves.

But even after a few deals, everyone is bound to run into a few challenges.

The Hindenburg falls on a Clover

Last week, Chamath was publicly attacked for his Clover Health deal. For the New Jersey readers, Clover Health was founded by the former owner of CarePoint Health, Vivek Garipalli. Clover Health is a low-cost provider for Medicare Advantage patients. All was going well until the light shined on the deal team.

Here’s what happened. Hindenburg Research released a long-form report challenging the SPAC and Clover Health’s business model. Hindenburg is the same company who exposed Nikola Motors as a fraud last summer. So public market investors pay close attention to Hindenburg.

The blimp challenges Clover Health for misleading investors by using Chamath’s celebrity status. The report details a SEC investigation that was not disclosed to investors. After the report was released, the SEC contacted Clover Health and is speaking with them regarding this matter.

Chamath responded over Twitter with a detailed writeup. Hindenburg sent back a response to his writeup the same day.

This story is far from over. Yet it is an important lesson when it comes to SPAC investing. Companies that IPO go through a more rigorous due diligence process. They go on a road trip and meet with dozens of skilled investors. SPACs leave the due diligence process to one lead investor like Chamath and retailers follow his every move.

I’ll leave billionaire investor Sam Zell with the final word on SPACs, comparing them to the dot-com era with rampant speculation.