YFI Rallies to $39,000, Buffett’s $6 Billion Wager and Understanding Risk Tolerance #8

Market Meditations | August 31, 2020

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Today we break down a high-risk high reward asset, YFI, and then proceed to talk about recognising our own risk tolerance. This is deliberate, do not blindly build exposure to assets simply because I talk about them. The purpose of this newsletter is not to shill investments but rather to keep meditators informed while building their skills as investors and traders.

Today’s Meditations:

  1. Scan the Week

  2. Defi’s Bitcoin and What You Should Know About It

  3. Ftx’s Serum Goes Live

  4. Cryptocurrency Earned From Carrying Out Microtasks Is Taxable, Says IRS Memo

  5. Ethereum Classic Hit by Third 51% Attack in a Month

  6. Buffett’s Berkshire Wagers $6 Billion on Japan Trading Firms

  7. Relentless Rally in U.S. Futures

  8. Suez Bid to Create World Leader in Waste and Waste Services

  9. Renaissance Capital Expects Fewer Chinese Companies to List in the U.S. Once New Regulations Kick In

  10. Recognising Your Tolerance for Risk

Scan the Week

Crypto News

  • September (no exact date) XZC Block Reward Halving

  • Tuesday 1st September. DOCK Launching Poa Mainnet

  • Tuesday 1st September. SXP Testnet Launch

  • Wednesday 2nd September.: Mettalex Staking Pool for FET Holders

Global News

  • Monday 31st August. Japan Consumer Confidence (August).

  • Tuesday 1st September. Reserve Bank of Australia Interest Rate Decision.

  • Wednesday 2nd September. Australia GDP Growth Rate QoQ (Q2) and YoY (Q2).

  • Thursday 3rd September. US Balance of Trade (July).

  • Friday 4th September. US Non Farm Payrolls (August)

Defi’s Bitcoin and What You Should Know About It

Few stories that have caught the attention that YFI’s launch and its subsequent astronomical price increase managed to collect. In the span of a few weeks, YFI went from a ‘completely valueless 0 supply token’ to a token price of $38,000 over the weekend. I decided to dive into the literature and update my readers on the things they should know about DeFi’s bitcoin and how it achieved Unicorn status in just over a month.

Genius Founder and the Most Fair Launch in Crypto’s Recent History.

Andre Cronje, the prodigy behind Yearn Finance and the YFI token has been called a genius by the DeFi community. A true libertarian that enjoys building and innovating on existing technology. Famous for his ‘I test in prod’ bio, which translates to not always testing code before launching a project, ‘selfishly‘ proclaiming that he builds products so he can use them himself. Yearn.Finance, Andre’s latest DeFi project and the protocol behind the YFI token, is a yield aggregator that automatically searches for the best yields across the different DeFi protocols. In simple terms, think of this as a financial robot that automatically distributes a user’s funds into protocols with the highest yields available. The protocol essentially does the hard work for you and re-distributes liquidity to other protocols once better yield becomes available across the DeFi ecosystem.

In a medium post on 17th July, Andre announced the introduction of the YFI token to supplement the protocol. A moment that will likely be remembered as monumental with regards to token launches and community governance. In the post, Andre describes the motivations behind launching the YFI governance token ‘in further efforts to give up this control’. He describes YFI as ‘a completely valueless 0 supply token’ and further explains that there was ‘no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on Uniswap, no, there won’t be an auction. We don’t have any of it.’

Andre kept zero tokens for himself and the only way to obtain the token at the time of writing was by providing liquidity to the Yearn.Finance platform, essentially enriching the earliest adopters and believers in the project. Because of the fair launch and success of the platform, a small but extremely motivated community gathered behind the YFI token in the days that followed. Andre designed the token to put the governance in the hands of the community. The YFI community saw the token as a claim on the platform’s success. The community proposes, Andre builds.

Low Supply, Scarcity and Market Caps

After YFI’s recent price surge, a lot of people felt left out and think they are too late to profit from YFI’s success. BTC parity, meaning that the price of one YFI was equal to the price of one bitcoin, was the first popular price target for the early YFI community. The momentum proved so strong and the price quickly moved higher last week. At the time of writing, YFI trades at $36,000 or 3.06 BTC, making it one of the most expensive crypto tokens in absolute terms. 

That said, what inexperienced crypto investors tend to forget is that you should always look at a project’s market cap instead of token price. A project with a token price of $1,000,000 isn’t automatically expensive when there are only 10 tokens in existence. For example, YFI has a total supply of 30,000 YFI, meaning that the project has a market cap of around 1,1 billion. If bitcoin was trading at YFI’s market cap, one BTC would be worth around $50.

Potential high rewards come with high risks and most products on the Yearn.Finance platform are still in beta. What started as a robot advisor searching for the highest yields is turning into a complete financial ecosystem with cutting edge innovation in multiple areas. Details are beyond the scope of this article but Twitter user @learn2yearn recently wrote about all the exciting stuff happening on the platform lately. Oh my, few understand…

Cash flow, Yvaults and token valuations

Next edition, we’ll look at yearn’s recent innovation featuring Yvaults. We’ll also take a deeper look at the project through a traditional finance lens and potential implications for YFI and ETH’s token prices. See you next on Wednesday!

  • Ftx’s Serum Goes Live as Dexs End Another Record-Breaking Month for Volume. FTX’s Solana based decentralized exchange went live on Sunday, claiming to be the ‘the first completely on-chain cryptocurrency ecosystem with trustless trading’, in collaboration with a consortium of crypto trading and DeFi experts. The DEX has markets for BTC, ETH, SRM and MSRM, with trading pairs against USDT and USDC for each. DEX’s in general are having an incredible summer by almost any metric. Uniswap, the most popular decentralized trading protocol, reported higher 24hr trading volume than Coinbase Pro, quite a milestone given how new these decentralized alternatives are. Is this the real flippening we were waiting for? Read more.

  • Cryptocurrency Earned From Carrying Out Microtasks Is Taxable, Says IRS Memo. In a memo published on August 28, the Internal Revenue Service (IRS) states that cryptocurrency earned from microtasks as low as $1 conducted on crowdsourcing platforms is considered taxable income. “A taxpayer who performs a task through a crowdsourcing platform, including a microtask, has performed a service for the party that requested the task with the expectation that he or she will receive compensation. If the taxpayer receives convertible virtual currency for performing the task, regardless of the value and the manner in which it is received, then the taxpayer has been compensated with property.” Read more

  • Ethereum Classic Hit by Third 51% Attack in a Month. A series of bad news for Ethereum Classic this month, as the blockchain suffered it’s third 51% attack. According to Bitfly, 7000 blocks or approximately two days worth of mining were reorganized. After the second attack, Okex responded that it was considering delisting the asset due to a severe lack of security. Coinbase also took drastic measures by extending deposit and withdrawal confirmation times for ETC to roughly 2 weeks. ETC price has lost about 50% of its value since the beginning of February but still has a market cap of over almost $800 million. Read more.

Buffett’s Berkshire Wagers $6 Billion on Japan Trading Firms

Warren Buffet’s Berkshire Hathaway Inc. bought stakes in 5 of Japan’s biggest trading companies, adding to the billionaire investor’s wager on the commodities sector and marking one of his largest-ever forarys into Asia’s second largest economy. 

‘I am delighted to have Berkshire Hathaway participate in the future of Japan and the 5 companies we have chosen for investment… I hope that in the future there may be opportunities of mutual benefit’ – Warren Buffet

Bloomberg reports: Berkshire acquired the stakes of about 5% in Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co and Sumitomo Corp. over the last 12 months, the U.S. conglomerate said in a statement. These are century old commodity specialists that are increasingly transforming into global venture capital and private equity businesses.

The investments were valued at more than $6 billion combined after shares of all five companies jumped at least 5% in Tokyo trading on Monday. Japan’s benchmark Topix index rose as much as 1.9% on the news. 

The Investment Comes at a Much Needed Time for Japan

Buffet’s wager could help bolster sentiment toward both commodity plays and Japan’s stock market, which has seen $43 billion of net foreign outflows so far this year. The country’s $5 trillion economy is not only grappling with a persistent coronavirus outbreak and the postponement of the Tokyo Olympics, it’s also going through a leadership transition after Prime Minister Shinzo Abe announced his resignation for health reasons last week (see previous Markets Meditation). Before its rally on Monday, the Topix had dropped for 3 straight days and underperformed regional peers in 2020.

The investment in Japan marks a move beyond the familiarity of the market in the U.S., where technology stocks have surged to record highs but other industrial investments have suffered heavy setbacks because of C19 pressures. CNN reports that it is a sign of how Berkshire may be trying to hedge against a weak US dollar.

  • Relentless Rally in U.S. Futures. Futures are pointing to a higher open in European stocks, following gains in Asia and yet another record in the U.S. to end last week. Strategists say the rally has further to go in the U.S., where the relentless five-week surge has sent the tech-dominated Nasdaq 100 Index to valuation levels comparable to the dot-com bubble. Small-cap stocks, meanwhile, continue to lag far behind. Read more.

  • Suez Bid to Create World Leader in Waste and Waste Services. French water and waste firm Veolia is offering to buy a 29.9% stake in its rival Suez from French gas and power utility Engie for 2.9 billion euros, saying it aims to create a “world champion of ecological transformation”. This echoes the eight year old attempt to create a world leader in waste and waste services. If the offer is accepted by Engie, Veolia will formally bid for the rest of Suez, Veolia Chief Executive Officer Antoine Frérot told journalists on Sunday. He added that Suez’s enterprise value, which includes debt, was around 20 billion euros ($23.8 billion). Veolia said its offer for Engie’s stake was in cash, at 15.50 euros per share, representing a 50% premium to the Suez share price as of July 30, when Engie said it was reviewing options for the holding. Read more.

  • Renaissance Capital Expects Fewer Chinese Companies to List in the U.S. Once New Regulations Kick In. As tensions between the China and U.S continue to rise, evidenced by the progression of the TikTok sale, Renaissance Capital looks to the future of Chinese companies in the U.S. Fewer Chinese companies are expected to go public in the U.S. market once new financial regulations kick in and those that are already listed there may return to China if they cannot comply with the rules, an investor told CNBC. Alibaba affiliate Ant Group, for example, is preparing for a dual listing in Shanghai and Hong Kong in one of the most highly anticipated initial public offerings.“We do expect to see fewer Chinese ADRs listing in the U.S.,” Kathleen Smith, principal and co-founder of Renaissance Capital, said on CNBC’s “Squawk Box Asia” on Friday. Renaissance Capital provides institutional research and IPO ETFs.Read more.

Recognising Your Tolerance for Risk

There are many general guidelines for investing and technical analysis can provide lots of useful information and indications. By far the biggest individual adjustment to these guidelines and analysis is your own attitude toward risk. In many ways, this is why no one can really ever tell you whether or not to invest in something; the context of your risk appetite/tolerance will always be a precursor to any type of assessment. 

Attitude toward risk forms the fundamentals of economics and is just as relevant in our space. Economists look at game theory and expected utility theory. Economists classify people as risk-averse, risk-neutral or risk seeking. You have just walked into Monte Carlo casino to enter a game of Texas Holdem.

You have been allocated your hand, it’s time to consider your chances of realising a profit. Fold, check, bet, call, raise – what are you going to choose? Let’s consider the different types of risk appetite: 

  1. A risk-neutral person ignores the dispersion of possible outcomes in any given scenario, betting if and only if the odds on a monetary profit are favourable. 

  2. A risk-averse person may bet if the odds are very favourable. The probable monetary profit overcomes the inherent dislike of risk. The more risk-averse the individual, the more favourable must be the odds before she takes the best. 

  3. The more risk-loving or seeking an individual, the more unfavourable the odds must be before the individual will not bet.

Perhaps you can begin to associate with one of the risk profiles. For the sake of clarity, there is no right or wrong here. The fundamental point is that these differences in risk appetite do exist, you should be aware of where you stand and you should consider your trading and investment decisions with your personal profile in mind. You will be a better trader for it. 

By way of example, realistically, a risk-averse individual will not have the willingness to stomach large swings in the value of investments; not only will they be mentally unhappy with their trading but they may panic and sell at the wrong time leading to suboptimal outcomes. For such an individual, they ought to have the self awareness to tread carefully when there is an investment decision associated with high volatility.

The message here is to understand your tolerance for risk. If you have read this article and have not been able to associate with one of the levels of risk appetite, chances are you need to spend some more time defining your risk tolerance.