Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
The lead advisors of 7investing and CryptoEQ host a monthly conversation for subscribers to better understand how cryptocurrencies and equities are colliding. In this month's "Collision Course", the teams discuss landmines investors should avoid, why decentralized finance is proving to be superior, and why Jack Dorsey is so jazzed up about Bitcoin.
July 19, 2022 – By Samantha Bailey
The crypto-economy is growing quickly, but it’s also constantly evolving.
Initially, brokerages like Coinbase (Nasdaq: COIN) profited simply by charging commissions for each time Bitcoin was bought or sold. They added more cryptocurrencies over time, though their fate was tied to trading volumes. Over time, more exotic profit strategies emerged — such as staking rewards, crypto-lending, or the use of cryptoassets as collateral for loans.
Yet some of those evolutionary new strategies appear destined to go extinct. Terra LUNA, Olympus OHM, and several other protocols lure investors with extremely high returns. However, the jury remains out on whether several of these practices are sustainable .. or even legal.
In today’s podcast, 7investing advisors Simon Erickson and Steve Symington chat with CryptoEQ co-founder Spence Randall about landmines to look out for when investing in cryptocurrencies. The three also discuss the opportunity for decentralized marketplaces like AAVE and why Jack Dorsey is so excited about incorporating crypto into Block’s (NYSE: SQ) ecosystem.
Simon Erickson 00:00
Hello everyone and welcome to our July 2022 cryptocurrency and equities Collision Course where we at 7investing team up with our partners at CryptoEQ to talk about the collisions between equities and cryptocurrencies. I’m 7investing founder and CEO Simon Erickson joined by my colleague Steve Symington, who is a 7investing lead advisor, and also Spence Randall is one of the principals and co-founders of CryptoEQ. Spence, how’re you doing this morning? How’s things going here in Houston?
Spencer Randall 00:28
It is hot, I’m melting over here.
Simon Erickson 00:32
113 heat index for us over the weekend. Steve, I assume that’s not the same for you up in Montana right now. At least I hope not.
Steve Symington 00:38
No we’re like 80 degrees. It’s perfect. I couldn’t do 113 that’s absurd.
Simon Erickson 00:43
Well, things are heating up certainly in the cryptocurrency markets as well. We got a lot to chat about, like we always do. So we’re gonna jump right in. Just to set some signposts for the conversation. We’re gonna be talking about the classic CeFi versus DeFi debate. We’re gonna talk about Jack Dorsey in a minute. We’re going to talk about some announcements from 7investing and CryptoEQ. But let’s start on the topic of unsustainable yield. Just to frame this a little bit before we get too into the nitty gritty, cryptocurrency exchanges kind of started rather simplistic, right. It was a way to buy and sell Bitcoin. The larger exchanges like Coinbase (NASDAQ: COIN) would take a small stake for anytime a transaction was made. But over time we realized that as assets were migrating to these platforms there was other ways that they can make money. And the crypto economy, as it was becoming known, was able to pay people with the assets in more and more ways. It was similar to that if you gave money to your bank, they could use it for other loans, which are higher value activities for them. The same thing was true for crypto exchanges. There was ways to use staking where you could actually use your cryptocurrency assets, for proof of stake, proving out the transactions that were on the network and you could get paid for this through commissions. There were other ways where you could actually have the exchange borrow your cryptocurrencies and pay you 6% to 10% APR interest rates, so they can be used for collateral for loans. But Spence I’ve got to start with you on this one, it seems like some of these more exotic ways that exchanges or cryptocurrencies or DeFi protocols are using cryptocurrencies. Some of them are great. Some of them are very credible, but some of them seem to be running into problems. Recently, we’ve seen some, there’s a new DeFi protocol called Olympus, I believe it is, with OHM, that’s a cryptocurrency currency that was offering up to 500% annual percentage rates for people that were actually participating in its network. Stuff like that seems like it might be a red flag to me, but what’s your take on what’s going on out there in terms of what’s sustainable versus unsustainable, and some of the ways that these cryptocurrencies are being used right now?
Spencer Randall 02:53
Yeah, I can say a lot here. The first thing I’ll say is kind of to point out patterns in how crypto protocols and crypto projects are allocating their spend. So developers are incentivized by, a lot of times, marketing incentives and adoption is incentivized a lot of times by marketing incentives. And some of the most successful projects in terms of gaining adoption did so by subsidizing yield. And it’s not a surprise that, double the market rate for yield is very attractive to crypto early adopters. So the best example of this is Terra, the Terra ecosystem, which has since imploded. But our early research identified that the yield that the anchor protocol was offering, which is part of the Terra ecosystem was completely unsustainable. And to give you a little bit under the hood kind of perspective, and when you peel the curtain, when you pull the curtain back, you look at what was actually happening. As part of their marketing incentive, they were allocating capital to basically double the market rate for yield on a specific asset. And that worked, okay. It worked great for adoption. It worked, okay, as a functioning crypto economy when the value of the collateral was appreciating. Now, when we experienced this sustained, healthy downtrend in crypto and the exuberance washed out and things got much more rational they were no longer able to sustain that rate of yield and the dominos started to fall and the whole ecosystem imploded. It’s the largest destruction of capital and crypto that I’ve ever seen personally, and I’ve been watching the space every day for five years. So a historic event, an important event, a sensational event, and a big lesson for the community to learn from. But that’s an example of unsustainable yield. And its impact on the crypto economy. One other thing I’ll say is for any folks that are part of the crypto ecosystem. Projects like Aave, which are a decentralized finance protocol that offers lending and borrowing opportunities in a decentralized manner, is a really great way to get a temperature check on some of the yield that’s being offered at some of the service providers that you’re using. So if you ever have any questions about whether or not yield is rational, that’s coming from a service provider or protocol or project. Aave’s a great benchmark to look at is this rational? Is this reasonable? Is this real? Because that’s truly an open decentralized marketplace where borrowers and lenders in real time are autonomously defining rates.
Simon Erickson 06:01
Spencer, you have called Aave a cryptocurrency blue chip. It seems like this is the bellwether, this is like you said, it’s the temperature check. It seems like if things are out of touch with reality that could lead to problems. But this is kind of a barometer that you use for what’s reasonable in the marketplace out there.
Spencer Randall 06:18
Yes, Aave has taken significant market share of DeFi. It’s emerged as the best lending and borrowing platform in DeFi. Another name I’d add to that mix is Curve Finance. Token CRV. Aave’s token is AAVE. But both of those projects are doing great things for DeFi and I would encourage the audience to read more about it. We have a report out on Aave at www.CryptoEQ.io for anybody that would like to read more free research on this DeFi blue chip.
Steve Symington 07:08
Sorry about that. That’s good. Yeah, it’s funny, because how often do we have significant market events like this that tend to materialize? And then we see sage advice from legendary investors like Warren Buffett come back into play, right. And the thing that keeps echoing in my mind when we talk about, kind of collapses like Terra’s, is when Buffett said, only when the tide goes out, do you discover who’s been swimming naked? Right. And it’s hard to judge, who’s truly successful in a bull market. It goes for investors as well, people investing on margin. On the topic of unsustainable yield. So it’s funny, it holds true across multiple markets, crypto equities, whatever we’re looking at. So it’s been interesting to watch, kind of this drawdown, not only in crypto, but also on the equity side, we just entered the worst first half start in any year since 1970. And the biggest drawdown in growth and tech stocks since Dot Com Bubble. And that it’s all happening in tandem, part of me wonders how much of this is an expectation of a drawdown in liquidity, a combination of all that tighter monetary conditions. Yeah, I think it’s something important to note though, from an investor’s perspective, that, that doesn’t mean markets overall are broken. You know, I think it also means that markets are working efficiently and we’re now seeing kind of how some businesses were doing things in an unsustainable way. And that hurts when you make that bet and you’re someone running something like Terra, and it implodes as a result. But
Spencer Randall 09:13
I’d like to speak more to Terra, and what made it special is there’s been a lot of things in crypto that’s convinced retail enmass to enter and allocate unsustainably, irrationally. Too much exuberance, a lot of things like that, that have collapsed, rightfully so. What was interesting about Terra is the amount of institutional capital and professional investors that were rallying around this vision for the project. And then to fail so publicly and catastrophically and destroy that much capital. It was the first domino in a series of things that have happened flushing out a lot of irresponsible, to put it nicely, risk that was in the crypto leverage system.
Steve Symington 10:02
So maybe we emerge from this stronger, a stronger system, right?
Spencer Randall 10:07
Simon Erickson 10:10
Let’s talk a little bit more about that one Spence. We wanted to talk again, we talked with your colleague Rayven Moore last month about the CeFi versus DeFi debate. Centralized versus decentralized finance. Can you explain first of all, what that even means for people that aren’t familiar with those terms, and why this might be an opportunity to flush out some of those toxic assets. Or to put it bluntly, some of the problematic things that were going on in crypto before this drawdown.
Spencer Randall 10:40
For the 7investing audience. The easiest first step from your equity brokerage accounts to the cryptosphere is CeFi. It’s stands for centralized finance. And it feels more like your crypto brokerage account where there’s some third party company that helps you gain exposure to what you’d like to invest in. And a lot of these companies will help you with your fiat cash on and off ramps. And the most reputable will allow you to withdraw and deposit crypto directly on the platform. So that’s, if you’re comfortable and want another company standing between you and your assets, then that’s what CeFi is for. DeFi is, in my opinion, still further out on the risk curve, because you remove that third party company, that service provider, which you ultimately do trust, from the equation, and it’s really you, a network that’s distributed, and in most cases decentralized, in some cases decentralized like Aave, and then peers. And all of these markets are made peer to peer. And instead of trusting a third party service provider, you’re trusting a network like Aave to make these markets, these lending and borrowing markets. So that’s the extra step that you’re making. If you’re looking at, say an exchange, instead of a lending and borrowing market like Aave, then you’re looking at a DEX, which is a decentralized exchange. You could think of it like your decentralized brokerage account. Yeah, DEXa is things like Aave that’s DeFi. And then CeFi would be more like Binance, Coinbase, Gemini, Kraken, Nexo more your leading names in the cryptosphere?
Simon Erickson 12:44
And are we seeing a breakdown of some of those CeFi names? I mean, some of those have had kind of either regulatory, they’re right in the crosshairs of regulators. Or some of them have been hacked into and lost assets. I mean, what’s your take on CeFi vs. DeFi? Is one of these models superior.
Spencer Randall 13:06
The big theme, if you look at it from a 10,000 foot view, is companies and projects with strong balance sheet and proper risk management are still very strong in this market. And that applies to CeFi and DeFi. And when I say company in the DeFi context you have to mean a well managed treasury, a well managed DAU. Now on the DeFi and CeFi side, you have companies and projects that did not manage risk well or did not audit their code to the extent that they should have and those went belly up. So on the CeFi side, the best example would be Voyager filing for bankruptcy. The biggest domino leading to that would likely have been the exposure to Three Arrows Capital, which is a crypto hedge fund that also is filing for bankruptcy. So you can see contagion that can be traced back to the Terra collapse still working its way through the crypto ecosystem. So the the short answer is, there’s great projects and companies in CeFi and DeFi that have proven to be resilient. And then the fun thing to think about is the CEO of the largest exchange in the world, CZ and by Binance, the largest crypto exchange in the world, said that DeFi will be the standard in 10 years. So that’s very interesting that someone that has built the largest centralized exchange for crypto in the world holds the view that CeFi will go by the wayside over time. As you know, he has everything to lose if their company doesn’t continue to embrace DeFi as they have been. They’ve been very progressive. But it’s not a short answer. But hopefully that made sense.
Simon Erickson 15:05
It’s complex. Steve, I mean, it’s similar to what we’ve seen with the equity brokerages, right? Like a model, like a Fidelity that’s got assets under management and you’ve got funds you can turn to. It’s not just an exchange, where you’re buying and selling. It’s been to kind of like, the skyscrapers get larger and larger when the brokerages charge lower and lower. And any other thoughts on kind of what Spencer was saying about how that might not be the same path that crypto takes though.
Steve Symington 15:29
It’s funny how you have a leader of a CeFi platform making prediction that DeFi’s the future. And it reminds me a lot of Jamie Dimon over at JPMorgan (NYSE: JPM) in his most recent annual letter to investors just a few weeks ago, I think, or maybe a month or month and a half ago. Where did the time go? Right? He was talking about how Neobanks and a lot of fintechs up and coming fintech companies are probably the greatest threat to today’s existing banking, legacy banking titans. And he’s talked about how they’re taking market share and in kind of a hybrid bank is really what they have their eyes on. So I mean, also, that’s a good sign of a good leader, that they can recognize those threats and position their own businesses accordingly. Doesn’t mean I want to go buy shares of JPMorgan, I’m more interested in a couple of the up and coming fintechs and including some that have actually become national banks themselves, like Sofi (NASDAQ: SOFI) for example. But yeah, it’s interesting to watch the parallels of the leaders in both sides of crypto and equity, kind of calling out what is the future and positioning themselves accordingly. And I think that’s encouraging, really, because they’re realists. Right, when they look and understand the dynamics of their own marketplaces. And perhaps the worst thing you could see is a leader in one of these spaces ignoring or underplaying the threats that they’re facing and getting disrupted. Right. That’s the standard innovators dilemma. The yellow book right here on the shelf, right, and yeah, so it’s encouraging to watch I guess. So.
Simon Erickson 17:24
It’s also I mean, something to keep in mind at the end of the day, too, is like with all these stories, right? Like you mentioned some of them and kind of our pre discussion brief here Spence. Like Three AC is filing for Chapter 15 bankruptcy in New York. Voyager is chapter is filing for Chapter 11 bankruptcy. FTX and BlockFi are reaching a deal for FTX to acquire BlockFi assets right now. There’s more and more acquisitions. There’s a lot of M&A going on. There’s a lot of bankruptcies going on. At the end of the day, I mean, there are still users and assets in play here. Right. These are still platforms that people have taken the time to sign up for, create accounts for, and now maybe they get kind of put onto a different platform that buys them or it goes bankrupt and they have to find something else. I mean, this is, when we talk about things like switching costs with banks or network effects with platforms. These are in play, when you’ve got assets, and you want exposure to these things. I think trust is becoming a large part of this more and more, and you’re starting to see the good news stories separated from the bad ones. And seeing, like you said, Spence the trends of what works and what doesn’t work. But at the end of the day, there’s still a lot of money that’s out there. Still a lot of uses that are interested in crypto. This is going to be a storyline to plays out for quite a while I think.
Spencer Randall 18:37
Yeah, there’s hundreds of millions of users up for grabs and billions of dollars of assets, some of which are distressed up for grabs. And this M&A activity I anticipate to take 12-18 months to transpire. But the kind of patterns in what I’m reading and watching and what our team’s looking at is FTX is posturing with strength. Binance is posturing with strength. Nexo is posturing with strength, and then a lot of what we could call secondary players. Some which were primary players at one point in time are getting acquired or merging.
Simon Erickson 19:25
Steve, we’re seeing the same thing in the equity world right and we’ve got rising interest rates which are making capital harder for smaller companies. Especially if they were saddled with debt and they’re not growing as quickly as they were. I mean, those that raised money last year, either at low interest rates or maybe used equity or did SPAC financing or whatever it might have been, have got a strong balance sheet now. They’re in, like Spencer just said, a position of strength to go out and make some moves. M&A included.
Steve Symington 19:49
Yeah. And that’s, you kind of called that out several months ago, and you said this is going to be, it’s going to be a harder market to raise cash and a harder environment. And if you don’t already have it, especially companies in cash intensive industries that require kind of establishing early industry leadership. The space economy for example, a lot of these rocketship companies and launch service providers need a lot of cash and if they weren’t able to raise it, they’re probably going to get acquired or go bankrupt. And we’ve seen a lot of, kind of, heightened M&A activity, just kind of across the board. There was a healthcare company just the other day on our scorecard that popped because there was some reported M&A interest in the company. And then a couple of my recommendations, and I think one of Matt’s, and Matt was like, ah this is devastating, if true, and one of his recommendations just last week. You know, there’s three different companies in the last week and a half on our scorecard that are they’re looking at getting bought out reportedly. Because, in part, their stocks have been thrashed in the growth stock pullback, and not that these businesses aren’t otherwise solid businesses. But I think not only are we seeing M&A activity because of distressed assets, or businesses that are having a hard time staying afloat, but also, we’re seeing M&A activity simply because valuations have compressed so deeply. And that we have larger industry players with the cash to spare, that are looking at potentially making a move while they still can. And, if you have an up and coming competitor, whose stock has been absolutely thrashed, and it was a $20 billion business, and now it’s a $4 billion business according to the market, why not try and make a play for it while it’s still cheap. So, in an ideal world, with a couple of exceptions, I would prefer to see the growth stories of these businesses play out if they’re otherwise healthy businesses. But I think we’re gonna see a lot of M&A in the next several months, unless the market rebounds in a big way. So yeah, a little heartbreaking for an investor who would rather let these growth stories play out. But that’s just how it goes sometimes.
Simon Erickson 22:18
I think so Steve, especially in software as a service, we saw the valuations for those, possibly a little overvalued in 2021 and have now come down to 10 times sales or less for a lot of those companies. I’ve seen a lot of private equity shops, trying to raise capital wherever they get it from right now because they want to take a lot of those private. Certainly heartbreaking, like you said, if you like the long term growth story, but it is something worth paying attention to. You mentioned that several of the companies on our scorecard are even M&A candidates right now for being acquired. You also mentioned the space economy is kind of a higher capital intensive industry, that we’ve got some companies that are protected. If you do want to see the 7investing scorecard, or even better, our favorite ideas from the 7investing scorecard. We just did something really fun last Thursday. We announced on 7-7, July 7 2022, we’re going to be introducing the Strong Buy portfolio. We’ve come up with our 20 favorite positions from all of our 7investing recommendations. We launched in March of 2020. And so here we are in the summer of 2022. We’ve got almost 200 reports that we’ve issued since we launched in those two and a half years. And we’ve said okay, out of all these companies that we picked, what are our 20 favorite ideas right now. And so we’re giving that away for free for any subscribers, you can also come take a look at it if you’d like. I’ll put the link to follow along we’re reviewing three of the 20 companies away for free, if you do want to follow along with that. The 7investing Strong Buy portfolio, Steve’s got some pics in there, I’ve got some pics in there. In fact, all of our lead advisors coming up with our highest conviction ideas. www.7investing.com if you’d like to check out our site. Spence, I know that you also a www.CryptoEQ.io have had some recent product announcements that are pretty exciting. You want to take just a minute to talk about those really quickly it’d be great.
Spencer Randall 24:06
Yeah, we’ve been, our motto is Always Be Launching. So we’ve been launching in perpetuity since we started our partnership with 7investing. Some of the things that I’m personally really, really excited about. We launched an audio feature. So I’m a big podcast consumer and a lot of the content I digest will be auditory and visual. So I can multitask and run and gun. So I can now, and anyone in the audience can now, listen to all of our research. All our core reports. You know, I think a nice analog would be the 7investing research that you do on the fundamentals of equities. We do that for cryptocurrencies like Bitcoin and Ethereum. So the deep research that we do on the crypto side helps us identify what is undervalued right now relative to the fair market value of things like Bitcoin and Ethereum. And so we have our own system at CryptoEQ that helps identify both value and growth investments. And we’ve been doing that for years as well. So the audio feature is something that I’m jazzed about. Something else that we’ve just launched is our API. So we’ve actually got other crypto businesses tapping into our systems and information via licensing and an API. Well, you’ll see more developments in the future on that. We’ll be announcing a partnership here very soon, with the first company that is using our API. So that’s manifesting that Morningstar crypto nickname that a podcaster gave us years ago. We are opening up our information and systems to API access.
Simon Erickson 25:57
Absolutely. Well, in addition to doing some great research, we kind of enjoy this conversation every month where we talk about where are these two colliding? I think one person that is part of the collision between crypto and equities, at least in recent years has been Jack Dorsey. Jack Dorsey, of course, such a fascinating individual, everything that he had built with Twitter (NYSE: TWTR), kind of in the news lately, we’ve seen Jack step away from Twitter’s board of directors here a couple of months ago. Twitter is in the process of being acquired, question mark maybe, by Elon Musk right now. And so that’s an entirely separate plotline. But we’ve seen Jack Dorsey kind of doubling down on cryptocurrencies, specifically on Bitcoin. Now, he is building some incredible things with the company formerly known as Square, he’s now renamed it Block (NYSE: SQ). And this is something that started as kind of a way for merchants to accept payments directly from credit cards, if you just had a smartphone. You always remember the little dongle that Square made so popular for merchants. Then kind of expanded into peer to peer payments, the Cash App was a great way to transfer money to your friends or to other merchants very quickly. On top of that, Jack really started getting involved with cryptocurrencies and wanted to make Cash App a way where you could actually buy and sell crypto. And he’s incorporated that into it as well. Steve, we saw that Block went out and acquired Afterpay, right, so now he’s interested in the installment plans and the Buy Now Pay Later plans. That was almost a $30 billion acquisition, if you can believe it, showing how all-in he is on something like this. And then just recently, not too long ago, we also saw him by Tidal. Something that was connected with Jay Z and others for NFT’s for musicians. Because he saw a lot of similarities between musicians and small businesses in terms of raising capital for projects or for recording and things like this. Spence, let me start with you. I would love to know your opinions of Jack Dorsey as an evangelist of cryptocurrency, specifically of Bitcoin. Is he moving the bar out there? Is he a visionary that’s got all these great ideas? Or is he kind of a step behind a lot of the other stuff that we’ve chatted about here right now? What is the insider’s take on Jack Dorsey from someone who follows crypto?
Spencer Randall 28:12
Sure. Before I followed Jack and his interest in crypto, I listen to a lot of interviews, I like to listen to interviews with founders and hear about how they think about the world. And I got to know Jack, through content as someone that is a builder and a hacker. And I mean that in a good way, like he likes to find the smartest way to build and he seems to really get a lot of fulfillment out of building. And I can’t think of an industry that needs more to be built than crypto. And so for someone that loves to build and grow organizations and culture this is a great space for him. Now, why Bitcoin? It’s a great question. So he’s known as a leader in the Bitcoin community, and he focuses on Bitcoin. And one of the reasons why that might be is if you’re going to invest 10 years of your life in an ecosystem, you’d want it to be in something that’s here to stay and Bitcoin is the most de-risked cryptocurrency in existence. So if you’re creating legacy and you’re building for a lifetime, it’s a great space to be a part of. Now, specifically, his vision is to help scale the Bitcoin network. And this is not, this is not, just limited to Bitcoin. All cryptocurrency ecosystems have to think about scale and have challenges with scaling. Ethereum and the list goes on are all wrestling with the challenge of scaling. And so within Bitcoin specifically, you’ve got a fantastically secure and great base layer in the Bitcoin network. But if you want billions of people to transact the top of the Bitcoin network, the question of scale, it’s screaming at you, right? And so a lot of what Jack talks about and focuses on is scaling Bitcoin through things like the Lightning Network. You know, an analogue to that would be, there’s other ecosystems like Ethereum that have their whole, you could get a PhD in Ethereum’s ecosystem, there’s so much intricate detail there. But Ethereum has its means and mechanisms of scaling. And Bitcoin has its means and mechanisms of scaling. And Jack thinks that a lot of DeFi can happen atop the Bitcoin network. So a lot of the things that we talked about earlier in the podcast about Aave, Ethereum, and the list goes on, Curve. He thinks that a lot of decentralized finance can and should happen atop the Bitcoin network. So I think that when he wakes up in the morning that’s what he’s fired up about is bringing more of DeFi to the safest and most secure network in existence in Bitcoin.
Steve Symington 31:06
Yeah, Dorsey, he’s an interesting fellow right. One of the big kind of takeaways, and I’m sure this will dominate, continue to dominate, headlines for a long time is that he talks about Block, the artist formerly known as Square, right, we can say, given their acquisition of Tidal.
Simon Erickson 31:27
What’s the symbol too Steve?
Steve Symington 31:30
Yeah. Oh, the Block symbol. Yeah, that was that was different. But it’s an interesting vision. And I think one of the headlines we’ll see dominate for a while is him comparing, him likening them to people’s early descriptions of Amazon (NASDAQ: AMZN) as a bookseller. He’s like, you can’t call Square a payments company. It’s like calling Amazon a bookseller and Amazon does a lot more obviously. You know, I mean, look at Block’s stock, SQ is the ticker, it’s down 75% over the last year. 60% so far in 2022. And, they’ve got a lot of irons in the fire. You know, and they’re renaming the company to revolve around their focus on blockchain and crypto. And yeah, he focuses, I think Spencer mentioned earlier, really on Bitcoin as kind of their primary lever. As sort of the cryptocurrency that kind of revolves around the internet. And, he doesn’t focus too much, what what was crypto at last glance as a percentage of the gross profits? It’s like 5%?
Simon Erickson 32:47
Very small, less than three, right?
Steve Symington 32:51
So you wonder how much of this pullback is because of their involvement, but maybe not necessarily deserved for the company. I mean, they’ve got a thriving ecosystem, a growing user base, gradually expanding profits. Really interesting to watch. I think it’ll be really interesting to watch what happens to them over the next five years. Because a lot of what he talked about at their their last investor day, and he hadn’t held one for five years. But a lot happens in half a decade in these kinds of markets. So yeah, I think he’ll be a trailblazer in this space, and one of those rare cases that crosses over between both crypto and equity, right? In the public markets.
Simon Erickson 33:43
It’s kind of interesting too Steve of like founders that can do what they want to and no one can tell them no anymore, right? Like we’re done with the days of Steve Jobs and Apple (NASDAQ: AAPL) where they needed to bring in an external CEO to take the reins because venture capital demanded it’s so. Same thing kind of a Alphabet and Google (NASDAQ: GOOGL) went through too when they brought in Eric Schmidt to kind of steer the ship for a little while. Now you’ve got Jack Dorsey, he’s still in the captain’s seat, still at the helm, and everything that he’s created at Square in that Block. Mark Zuckerberg got to put him in a similar boat that refused money early on. And now just the transition, thinking of something like what Facebook (NASDAQ: META) was as a collegiate network where people were making friends. And now he wants to go all in on the metaverse. He wants there to be billions of users across the whole world using virtual reality. And this entirely new way, which is still a fraction, just a very small fraction of what Facebook’s revenue is today. It’s still primarily targeted advertising. It seems similar to Jack Dorsey and what he’s wanting to do. Like you just mentioned, Block is not a payments company, just like calling Amazon a bookseller. He has some big ambitions with crypto right now. They’re still like less than 10% of the contribution of where they’re actually making their money from. It’d be really interesting in my opinion, seeing what an evangelist he is for cryptocurrencies and everything that he’s wanting to, he was even trying to push Twitter in this direction too and now he’s not calling the shots for Twitter quite as much. But I do think it’s gonna be really interesting to see where Block goes in the future. Spence, any final thoughts on Jack or on Block or you know where he’s kind of steering the ship right now?
Spencer Randall 35:19
My general statement on the technology that’s being developed, whether it’s Bitcoin or Aave, or the list goes on, there’s a lot of great, interesting things happening crypto. The technology a lot of times is the backend. And then as users, we use apps every day, web apps, apps, and it’s all about the user experience, the interface. And the front end can stay the same, and the back end can change completely. And whether Dorsey is successful in his vision. Whether Aave is successful in their vision in the long term, the back end of what we’re doing can change. And we can just continue with the type of behaviors that we have when interacting with our personal finances, or company finances. And for a lot of folks it won’t matter to them, the how, so long as they can. And I think that in so far as Bitcoin and crypto. And these other innovations in FinTech are happening. And it’s increasing margins. And it makes sense from the business side of things, and the user experience is great, then we’ll continue to move in this direction. And that’s happening in the Bitcoin ecosystem, it’s happening in DeFi. We’re hearing banks signal this. The writing’s more than on the wall. And the markets, markets are down, things are a little more quiet, it’s a great time to do fundamental research into the equities and the cryptos that you think are going to change the world. And that’s why we’re here to help.
Simon Erickson 37:01
Absolutely. And Steve one more thing, maybe I should call some attention to when we are talking about leadership, and the vision of these billionaire entrepreneurs, and there’s quite a few of them out there right now, is to really go behind the curtain and look at the proxy statement and look at stock based compensation. And more broadly, the compensation plan of how a lot of these companies are paying their executives. When you do have either a majority control or a large percentage of a company’s voting control in the hands of a few individuals, they oftentimes have their vision, they want to do things their way and they have, what they want the company and its resources to be used to accomplish that. Sometimes that’s not always to the benefit of public shareholders such as ourselves. Twitter has suffered from excessive stock based compensation for many years. I can rattle off several other companies that are having similar problems. And with stock prices hitting the low point of the cycle here, that can create a lot of problems for some tech companies. I know that’s something you and I chat a lot about. We talk about incentives and stock price comp and even capital allocation.
Steve Symington 38:05
Right. Yeah. And that all speaks to dilution for existing shareholders. There’s a couple of those companies that have talked about, as it’s become more important, to investors anyway, we’ve seen kind of the topic of dilution, stock based compensation, get a lot more airtime in quarterly earnings calls. And these companies said, hey, it’s okay. We’ll keep dilution under 2% and, yeah. Because it wasn’t that big of a deal when you’re given away shares that are just appreciating, nobody cared as much, how much they’re being diluted, as long as share prices are soaring. And, yeah, now it’s a little different. People are a little more selective about what they’re willing to accept from executive teams.
Simon Erickson 38:52
Spence, is there any analog to this in the cryptocurrency world? You know, Steve and I talk a lot about executive compensation, stock based compensation, capital allocation, and how they’re using the resources on a company’s balance sheet. A little different when you’re running a cryptocurrency or creating a new token. But how do you kind of think about the visionary leaders and the way they’re heading it, versus kind of the blocking and tackling of how people are getting paid and what the incentives look like?
Spencer Randall 39:17
Yeah, so the interesting thing is a lot of what the conversation just transpired, it’s code. It’s written into smart contracts of some of these protocols or is controlled when the token launches. So the analog would be something that we look at in every single core report and rating that we we do and publish and evaluate. Insider access to tokens. How the token was launched. What is the breakdown between investors and insiders and team members versus say what was made available to the community and what was locked up for long term governance incentives. So there’s this great article that circulates every now and then and shows a breakdown and pie chart of of the most popular tokens and what the distribution was at launch. So that’d be the comparison. That’s the executive comp plan and the team comp plan comparison in equities markets. It’s in the form of tokens in the crypto sphere.
Simon Erickson 40:26
Well, this is always a fun conversation. Huge thanks to Spence Randall from CryptoEQ and Steve Symington here from 7investing. You know, this is always fun, chatting about everything from compensation plans, to what Jack Dorsey is up to, to CeFi versus DeFi and of course to the unsustainable yields that some of the cryptocurrency projects are working on. This is your July 2022 Collision Course between our two companies. We look forward to chatting with you again in August. In the meantime, check out www.CryptoEQ.io for their core reports, check out www.7investing.com for our recommendation reports. We’re bringing the best of both worlds from equities and cryptocurrencies to you. In the meantime, we are here to empower you to invest in your future, we are 7investing, and we’ll see you next month.
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