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Monthly Market Muhsings - August 2021

Markus Muhs - Sep 03, 2021
August was a somewhat uneventful month on the markets, but a sort of wild month in cryptocurrency and NFTs!
August was the 10th month in a row that I kept the all-time high number for the S&P 500 in the drawdown table below BLUE, signifying that a new all-time high was reached during the month. It’s also the 7th month in a row that finished positive. The only negative month this year for U.S. stocks was January, which posted a 1.1% decline. Interpret that all however you want. Maybe the markets just have a lot of steady momentum.... or maybe they're due.
 
 
 
 
Crypto markets had some pretty big ups and downs during the month; most recently up. You might have noticed a new line in the table above and are wondering “what in tarnation is a CryptoPunk?”.
 
NFTs are “Non-Fungible Tokens”, and there’s a bit of insanity going along with them presently, not unlike meme stocks earlier this year. Maybe too much fiat money is indeed being printed? 12-year-olds are becoming millionaires on this stuff.
 
I won’t go into too much of an explanation on NFTs (you can use the link above for reference) and I don’t fully understand them anyway, but it was CryptoPunks that were in the headlines this month after Visa (an actual respected corporation) ventured into the space by buying one for $150,000.
 
Wait, what did they buy? Quite simply they bought this jagged little image that looks like it could be a character in 1987’s Maniac Mansion video game (who remembers those glorious CGA graphics?):
 
 
 
 
Apparently, CryptoPunk 7610 has already been bid on as high as $497K, which values the 24x24 bitmap at almost $1000 per pixel. This was not even close to the most expensive CryptoPunk traded in August; the one I refer to in the table above traded digital hands on August 4th for the equivalent of $2.53 million and was then sold on August 24th for $5.33 million. 
 
Key words above: “the equivalent of”. Other than Visa’s purchase, I highly doubt there are a lot of people out there mortgaging houses or liquidating stock portfolios to convert the cash into Ethereum, with which to purchase these things. Most of that Ethereum is already out there (in the "ether"), and it happens to be worth a lot in USD now, making those transactions of a few hundred ETH, among people who already own a bunch of it, seem like a lot.
 
Michael Batnick did a nice summary on the phenomenon here: Some Thoughts On CryptoPunks.
 
What makes a bunch of pixels worth as much as a used Gulfstream jet? Well, there are only 10,000 CryptoPunks in existence, #7252 is extra rare, as one of only 88 "Zombie punks" (of which there are 6 for sale presently, ranging in price from one year of Leon Draisaitl's annual salary to a year of Connor McDavid's). It's the only one in existence that has "crazy hair", an earring, and a chinstrap beard. Yeah. 
 
To try to rationalize the value of NFTs, I thought I’d relate them to collectibles that I do know a little about. 
 
If you read my post entitled How I Invest My Money you’ll know that I’ve got a bit of a coin collection. I don’t really consider myself a numismatist in any regard, but what started with me stacking silver bullion in 2014 (when I figured silver couldn't get any cheaper) morphed into collecting semi-numismatic bullion sets. These are uncirculated bullion coins that the mints of the world sell at slightly above their melt value, which have some kind of commemorative theme to them. Most importantly, they change the designs on them annually, to encourage collectors to try to assemble the whole set. They are still minted in fairly large numbers (hundreds of thousands to millions), so they’re not that rare nor exclusive, but the desirability (to complete the set!) generally lends them a premium over boring old bullion coins like Canadian Maple Leafs or U.S. Silver Eagles.
 
Examples of such sets include:
 
  • The Chinese panda series, where each annual coin has a different picture of panda or pandas on it.
  • Lunar New Year series from a variety of mints; the most popular seemingly being Perth Mint’s.
  • Coins with various animals on them, generally from the Royal Canadian Mint or Perth Mint.
 
 
 
 
As an example, here’s a set of Perth Mint Kookaburras. Each coin is a Troy ounce of silver (around $24US) and PM mints up to 500,000 per year. Once they're sold out, if you’re looking to buy either one of the above your lowest “buy it now” price on eBay is $50US, including shipping. Let's assume that's the current "collector value".
 
Each coin effectively has $26 worth of material value (including $2 for the capsule they come in) and almost the same again in intangible value. If these coins were minted in much greater numbers they wouldn’t be worth as much. If they weren’t of a desirable series they wouldn’t be worth as much (PM has mass-minted all sorts of other Australian animals, but none are as popular as this series). If they all just had the same design year after year they also wouldn’t be worth as much. 
 
Being one of 500,000 1oz silver Kookaburra coins minted in a year with a particular design, which many collectors around the world need in order to complete their ongoing collections, gives the coin that extra $24 or so of intangible value.
 
Now take those value metrics and apply to CryptoPunk NFTs. The only thing that’s missing is the tangible, so if we were using the 2015 Kookaburra to start out, subtract $26 from $50 and you’re left with $24 of intangible value which is no different than the value ascribed to digital collectibles. 
 
Factor in that the mintage of CryptoPunks is only 10,000, instead of 500,000. Factor in that the CryptoPunk series is trending a lot more today than Kookaburra coins (have you even heard of Kookaburra coins before today?). 
 
On top of that, factor in that each and every one of the 10,000 CryptoPunks is unique by easily identifiable features. If someone shows you a picture of a CryptoPunk you can actually look it up based on features and find out who owns it (and what else they own). Can you imagine what each coin in a coin series would be worth if the mintage was 10,000, each and every coin was identifiably unique in a way that is impossible to replicate, everyone was talking about it, and it was un-stealable, with ownership permanently secured on the blockchain even if you lost it? The value of the underlying metal would of course be a rounding error in its overall value.
 
So, I totally get the insane valuations of these things, however, just like my coins, their full value depends entirely on another collector desiring them. If nobody wants to own a CryptoPunk, they’re worthless. If nobody wants to collect Kookaburras, my coins are worth $26 (including capsule).
 
Meanwhile, a stock’s underlying value is the value of its property, plant, equipment, IP, and ability to generate profits now and into the future, and perhaps even pay dividends. An NFT has nothing tangible attached to it, nor even does it have the functionality of the Ethereum used to buy it with. CryptoPunks are an early use demonstration of the functionality of tokens on the blockchain, perhaps hinting at future uses (imagine securing your identity digitally on the blockchain).
 
For investments, I’ll stick with what I know. Stocks have real values based on a company’s assets and earnings–now and in the future. By owning the U.S. index I own companies that make the pocket computers we use every day and spend ridiculous amounts on every couple of years (or monthly through our mobile plans). I also own the company that makes the software that I’m writing the draft of this blog post on, the company I do all my online Christmas shopping with, and the company distracting me right now with notifications about my friends’ latest political rantings. A little further down the list, I own the company that makes the electric cars everybody wants, the company that makes the graphic chips that are processing the pixels you are looking at right this moment, a company making vaccines and other drugs and household goods, the largest bank in the world, and a company that collects insane amounts of insurance premiums and reinvests them into all sorts of other stuff. That’s the top 10.
 
What do CryptoPunks do to generate profits, pay dividends, etc? CryptoBums more like it!
 
 
Investment Advisor, Portfolio Manager, and CryptoPontificator
 
 
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