What is The Long Trade about?
The Long Trade · Edition #1 · Nov. 15, 2021 · by Daniel McKeown
Welcome to the first edition of my investing newsletter; to start off I will cover the epic run of Big Tech in the stock market over the last several years and the NFT trend in the cryptocurrency space.
The Long Trade on Big Tech
Why "The Long Trade?" I decided to name this newsletter after one way of describing the last decade in the stock market, which saw the fast and historic rise of the tech giants to the highest market capitalizations ever seen for public companies. Along the way, some of the previous decade's (and century's) biggest investing plays--oil and gold--have seen decidedly mediocre results on their ten year charts. Many companies rode this wave, but the biggest of the giants right now includes Microsoft, Apple, Amazon, and Google parent company Alphabet. These companies, along with Nvidia, Netflix, and others, have all seen remarkable returns and simply buying their shares--or just a NASDAQ 100 ETF (or even an S&P 500 ETF, as weighted as it is with these companies)--and holding over the last several years was a great long trade.
How good of a long trade was Big Tech over the last several years? It has crushed bearish hedge funds, one of which took a big position against the sector even recently and as the market continued to boom subsequently decided to end its continuing run of losses and shut down. The record-setting run of growth of "growth" investments has left the traditional "value" investing strategy in disarray. Generally the Big Tech shares have not moved down to ratios where they get on value investors' radar but they have continued to grow at such a rate that they accounted for a large share of the overall growth in the market--leaving those chasing "value" plays far behind in aggregate performance.
Since Tech has become such a large share of the S&P 500, buying an ETF tracking that index would have yielded excellent returns in the last few years, only trailing the very Tech-heavy indices like the NASDAQ 100 and far outperforming the Dow, with its heavy emphasis on traditional industrial companies.
But we are all told that past performance doesn't guarantee future returns in those disclaimers. So will the Tech trade continue to perform at the same level in the next few years? There are reasons to question this. First, Big Tech has had quite a run. Profits have largely grown with share prices, and it will be hard for any company their size to grow at the same rate as the last decade. They should still remain profitable and growing! But I wonder whether an investor might have to selectively search out smaller tech players and new IPOs to capture that full level of hyper-growth going forward. This is mainly due to the increased anti-trust scrutiny that has made it harder for the Big Tech companies to "acq-hire" companies and consign their competing products to oblivion.
So while I am very excited about what smaller techs like Gitlab, CloudFlare, and Etsy are doing, I still recommend a good allocation for a NASDAQ 100 ETF (e.g. QQQM) and probably also the shares of Apple, Google/Alphabet, Amazon, Microsoft, and Nvidia, (but not Facebook).
Covering stocks and cryptocurrency
In the last few years I have researched the emerging world of Bitcoin BTC and other cryptos and have made some investments along the way. The buzz around defi (decentralized finance), web3 (a web that users can own), and NFTs (digital collectibles) has only grown this year as people discover new uses for crypto, while Bitcoin has increasingly been discussed as a possible inflation hedge and has seen a good run after a rocky first half to the year. Meanwhile in the traditional markets, Bitcoin futures ETFs such as BTF have been approved and made available to the stock-buying public.
Taking a look at the NFT space and some of the relevant tokens
NFTs (Non-fungible tokens) are a type of cryptocurrency that cannot be divided up and sold in parts--they typically represent a way to cryptographically "own" a single online asset such as an image.
Ethereum ETH is the biggest player in the NFT space right now: it is the best-known blockchain for hosting NFTs. The space was largely invented on Ethereum with pioneering projects years ago like CryptoKitties. Now the popularity of NFTs along with defi (decentralized finance) applications like Uniswap has led to the "gas prices" (transaction fees) on Ethereum to spike to unprecedented levels. For example, minting an NFT using Ethereum with the popular OpenSea platform would have cost over $100 during some time spans during early November (as the level of activity spikes, so do the fees). This has led to an explosion of alternative blockchains being used for NFT minting, including Polygon, Tezos, and Solana. But while these platforms are taking off right now, Ethereum is plotting a comeback--over the next six months the network is expected to undergo a set of upgrades that promise to lower fees. So while Ethereum is costly to transact on right now, the case for buying and holding ETH is somewhat linked to confidence that these upgrades will go smoothly and NFT activity will pick back up afterwords.
Decentraland MANA had a pretty incredible run at the end of October, jumping from under $1 to above $3.50 in a few days as it become the latest red-hot alt coin. So where does Decentraland fit into the NFT space? Decentraland is an immersive game-style experience, where players can wander around many different kinds of settings. Since it is set up as a massive multi-player online world, it can offer venues for display, sale and marketing of NFTs as they are displayed in virtual galleries and exhibition spaces, often with metadata about the item and sometimes with an offer to purchase. In this way it is not a pure-play for NFT hosting but rather an ecosystem play as NFTs appear to be how art is done in the virtual space. Hype around the 'metaverse' and Facebook's questionable but high-profile attempts to get itself noticed with a "Meta" rebranding may have contributed to the jump in the MANA crypto as much or more as the hype around NFTs. Like many newer tokens, Decentraland's MANA is an Ethereum ERC-20 (fungible) token.
Polygon MATIC aims to solve certain issues with Ethereum, so it is sometimes referred to as a "layer 2 scaling solution." With support for Ethereum tooling and wallets, Polygon promises to offer Ethereum-like functionality but with lower fees. This proposition has led NFT sites like OpenSea to offer Polygon as an alternative blockchain for minting NFTs. Part of what Polygon does differently includes the use of a "proof of stake" system for consensus (rather than "proof of work" as Ethereum currently uses) but in the next several months Ethereum's upgrades promise to switch that blockchain over to a proof of stake system. Polygon is an Ethereum token ("ERC-20") and offers features beyond lower fees like a flexible security model and "optimistic rollups," but if the Ethereum upgrade goes well and fees are lower then Polygon will have to try to differentiate with those other features in the next year.
Solana SOL has gained considerable momentum this year as an alternative blockchain to Ethereum with low fees and a growing following in the web3 gaming community. With so many virtual items on sale in games, developers can differentiate their product by offering these items as NFTs, thus allowing the players to use the blockchain to verify their ownership of their virtual items. Aside from game items, a number of artists have also been attracted to the platform and many new “traditional” NFT projects (sets of digital art items based on one character but with about 10,000 different combinations of clothes, accessories, and objects) have debuted on Solana NFT sites like Solanart and Magic Eden.
If I were to think about NFTs from an investing perspective, I don’t think I am saying anything that’s non-obvious when I say collectibles are a very particular kind of item to buy. While I am not as bearish as many people about the overall NFT market, I just think that collectibles are a hard thing to predict as far as demand. Many fall into obscurity, while a few endure as classics. I would say that my investing premise here would be to buy the underlying protocols and currencies behind NFTs rather than the items themselves—and look at NFTs more like art collecting.
Up next
In upcoming newsletters I will look further at the increasing intersection of cutting edge technology and digitized finance, and the numerous effects that code and digitization are having on literature and culture. If you would like to share information on one of these subjects with me, you can find my contact link here.
Disclosure: Through personal holdings that I control and through investment LLCs in which I am a partner, I buy, hold, and sell stocks, bonds, ETFs, options, and cryptocurrencies, not limited to but including some of those discussed in this newsletter.
It is worth mentioning briefly that I would exclude Facebook/Meta at least as far as buying their individual shares. All those other companies I just mentioned like Apple and Google create great products that add real economic value, while Facebook does not.
Technically an NFT is more like a link to an image than an actual image, but sites like OpenSea offer optional tools to “freeze” the NFT so its image is saved on a blockchain using Filecoin and IPFS