Thursday links: Systemic risks, digital oil and Black Wall Street

This is a segment from The Breakdown newsletter.

1. The investment case for MSTR is gibberish

The forensic short-seller Jim Chanos describes Michael Saylor’s investment pitch for Strategy as “complete financial gibberish.”

Chanos was responding to Saylor telling CNBC that investors should value Strategy at a multiple of its growth in NAV.

But Chanos argues this is “like claiming that your house, which increased in market value last year from $450,000 to $500,000, is actually worth $1.5 million, because you also have to put a 20x multiple on the $50,000 increase!”

Matt Levine agrees with Chanos that this is “gibberish” — and also “crazy-making” in part, because the popular idea that MSTR offers leveraged exposure to bitcoin is nonsensical:

“It’s not levered bitcoin for you,” he explains. “You put in a dollar and get back $0.50 of bitcoin, which is the opposite of leverage.”

One thing that Saylor certainly has right, however, is that shorting MSTR is risky; Chanos is far from the first short seller to target MSTR and I’m not sure it’s worked out for any of them so far.

But it’s hard to argue with his investment advice that “it is usually wise not to pay $2 for each dollar bill.”

2. Tron is “going public” on US exchanges

The FT reported that “Justin Sun’s digital asset platform Tron is set to go public in the US.”

I don’t think that’s exactly correct because it’s not Tron’s token, TRX, that’s being listed, but a new company, Tron Inc., which will hold TRX tokens.

Matt Levine more accurately describes Tron Inc. as “a US-securities-law-compliant wrapper for Tron tokens.”

This feels like a shark-jumping moment (in my colleague NLW’s phrase). Because unlike bitcoin or SOL, it’s impossible to argue that TRX is decentralized enough to qualify as a commodity.

A TRX treasury company is therefore a blatant regulatory arbitrage that gives US investors access to an unregistered security.

They seem bizarrely eager for it — Levine noted that the Tron SPAC was trading at a 1,700% premium to NAV this week, “suggesting that the stock market will pay $18 for $1 worth of TRX.”

$18!

As long as investors keep paying irrational multiples of NAV for exchange-listed crypto, we’ll keep getting more of it.

Even HYPE, which approximately no one outside of crypto has ever heard of, has a reserve company now too.

Show me the incentives and I’ll show you the (almost certainly bad) outcome.

3. Crypto treasury companies are a systemic risk to crypto

A report from Coinbase cautions that the current proliferation of Strategy copycats poses “systemic risks for the crypto ecosystem.”

The first risk they note is that if treasury companies are unable to repay convertible debt by issuing new debt, today’s buyers could become tomorrow’s sellers.

That seems obvious enough, although no one else seems to be worried about it.

The “subtler” risk, however, is if “one or more of these entities unexpectedly offloads a portion of their crypto holdings, even if it’s for routine cash flow management or business operation purposes…others may rush to sell as well, destabilizing the market well before any actual debt repayment issues emerge.”

That, too, would seem obvious — in hindsight.

4. ETH as digital oil

ETH has cycled through multiple elevator pitches — world computer, ultra-sound money, crypto app store — none of which have really caught on with investors.

But the team at Etherealize wants to try again, now framing ETH as “a productive reserve asset: digital oil powering the digital economy.”

This, they estimate, justifies a short-term price target of $8,000, a long-term target of $80,000, and a “thought-experiment” target of $740,000.

The latter would make Ethereum worth $89 trillion.

Lord, give me the confidence of an investor who believes a $300 billion asset can be mispriced by 30,000% (even as a long-term thought experiment).

Only in crypto.

5. A black-swan risk to markets?

Mathew Pines of the Bitcoin Policy Institute tells David Beckworth that he expects the US to end the exemption that makes interest on Treasurys tax-free for foreign holders “in the next two months.”

Beckworth responds that this seemingly mundane change in tax law “would be shocking.”

The risk is that ending the exemption would likely lead to higher interest rates as foreign central banks switch out of Treasurys and into alternatives like German Bunds, Swiss francs, gold and maybe even bitcoin (which Pines believes is an easy 10x in that scenario).

More importantly, this could destabilize global financial markets, which have become fundamentally dependent on Treasurys as the world’s only risk-free asset.

Shocking indeed — people are increasingly worried that the US is slowly losing its “exorbitant privilege.” But this seems like a way to lose it quickly.

Markets have been unusually adept at pricing in all the political shenanigans this year, but I don’t think anyone is ready for that.

6. Circle executive’s big payday

If I’m reading his SEC filing correctly, Circle’s chief legal officer, Tarbert Heath, owns 839,761 restricted units of newly IPO’d CRCL shares and 939,968 stock options (with an exercise price of $25.09).

At this week’s share price of $150, that would be worth a whopping $243 million.

Other Circle executives hold even more CRCL but I’m mentioning Heath here because he joined Circle two years ago.

It’s one thing to hit that kind of IPO jackpot as a founder; it’s another thing to make it as a recently hired employee.

I knew I should have gone to law school.

7. Black Wall Street was the original Wakanda

In recognition of the Juneteenth holiday in the US, I thought I’d highlight the amazing — and tragic — story of the Greenwood district of Tulsa.

Amazing because, just three decades removed from the Civil War, Greenwood was such an economic success story that it came to be known as “Black Wall Street.”

Like Wakanda from Black Panther, this honorific is a little mythical — there was no Black Goldman Sachs in Greenwood, for example.

But by 1900, Greenwood had become “a self-sustaining ecosystem of Black excellence and prosperity,” according to one account, and “an intentionally all-Black community” where “all was vibranium,” according to another (referencing Black Panther again).

Ironically, part of that success was attributed to Jim Crow laws that forced Greenwood’s residents to spend their money with businesses owned by their neighbors.

“In Greenwood, a dollar would change hands 19 times before it left the community,” according to the local attorney Buck Colbert Franklin. “That’s what you call real wealth-building.”

Some of the residents of all-Black Greenwood were so wealthy that when envious white rioters came to burn the neighborhood down in 1921, the nicest residences were said to be spared because the arsonists couldn’t believe that such wealthy homes could possibly be owned by Black Americans.

That attack on Greenwood was originally declared a “riot,” in part to falsely imply that there was blame on both sides.

But, perhaps even more cynically, there was a financial reason as well: Calling the events of 1921 a “riot” allowed insurance companies to deny claims filed by Greenwood’s residents.

Dozens of Black-owned businesses and more than 1,000 homes were destroyed in the “riot,” but the only insurance claim paid out was to the white owner of a pawn shop that had been raided for guns and ammunition to be used against the Black people in Greenwood.