Category: Uncategorized

USA – The End of an Empire

Posted on by Steve Sammartino

“What? The land of the free? Whoever told you that is your enemy!” – Zach de la Rocca, 1992.

Let me back up a little. Growing up as a child in the 1980s, America was the land of milk and honey, where dreams came true. I just assumed one day I’d move to America. Saccharine sitcoms like Happy Days, Family Ties, Growing Pains and The Cosby Show led me to believe that everyone lived in double story houses, had professional parents without money problems, enjoyed excellent health, were well-educated and that racism didn’t even exist. That was until I peered behind the curtain and saw the reality. Pre-internet it wasn’t that easy to work out what was happening in other countries, because TV, advertising and imported products were our only windows to the world. Oh how little I knew. While it seems the perpetual decline of the US is inevitable, I sometimes wonder if it were ever more than a Hollywood prop.

We are collectively viewing the end of the shortest empire in history, the United States of America. Granted, it was at one point probably the most powerful in history, yet now is crumbling before our eyes. We are witnessing a modern day fall of Rome, live.

To perpetuate an empire, three things need to be maintained:

  1. People need to become a little bit smarter
  2. People need to become a little bit healthier
  3. People need to become a little bit richer

The US is not performing well against these three criteria. It’s the only developed economy in the world where this is the case.

Smarter: It’s clear that the US has some of the world’s greatest thinkers and innovators. However, in recent decades, simple markers of intelligence and collective understanding of the world have declined. It’s astounding how many US citizens deny facts which are indisputable and learned in grade school. Thirty percent of millennials in the US are not convinced the earth is round. This number is only 4% for the rest of the world. In the mid 1970s at the peak of the space race, the proportion of ‘Flat Earthers’ in America was less than two percent. One third of Americans cannot name a single branch of their own government. A quarter of Americans believe that the sun orbits the earth. Twenty percent believe that humans were created 10,000 years ago.

I’ve chosen facts like these, because they should be universally agreed upon. Acknowledgement of these facts frame a viewpoint of society where basic knowledge is important to shape government policy and to address vital issues like climate change. (Coincidentally, of which a quarter of Americans deny.) It also is unlikely that the US can educate its way out of this mess. Access to education in the US is bad and getting worse. Student debt as of April 2022 was US$1.75 trillion dollars. The average debt to education costs per household is US$57,520. The cost of higher education in the US has outpaced inflation for 4 decades. Before anyone even gets to college in the US, they need to fight their way through an incredibly difficult K-12 system, where the amount of money the government spends on a local school depends on how much the houses in the areas are worth. The higher the real estate prices, the more funding local schools attract. If you think this sounds like something from a Black Mirror episode, trust your instincts.

It’s hard to pinpoint exactly how and why the US, once the bastion of global intelligence, is experiencing such a decline. I can’t help but think that the past two decades where, from Fox News to Facebook, the spread of misinformation in the media has significantly contributed to the dumbing down their society.

Bonus: if you want to get smarter – Catch up on The Rebound TV here.

Healthier: For the first time since the industrial revolution, America has witnessed a decline in life expectancy. They lost 2.26 years in the past year alone. This is at a time when medical advances (and terrific things like vaccines) have never been more advanced and available. They suffered more deaths due to Covid than any other developed nation, which is now pegged at more than one million people. They have the lowest vaccination uptake of all developed nations, currently ranking 64th in the world. The crazy thing is that they spend more on health than any other developed nation. They spend US$4.1 trillion on health annually – US$12,530 per person – which is increasing at 9.7% per year, yet for the worst health outcomes. (Most of the spending goes to insurance companies.) They are the most obese nation in the world, with 42.4% regarded as clinically obese. In the year 2000, this number was just 30.4%. For the first time in their history, children are not expected to outlive their parents.

The opioid crisis in the US is at such epidemic levels that it killed over 100,000 people in 2021 and it is getting worse (in 2020 the opioid crisis was responsible for 78,000 deaths.) In contrast, over 45,000 people died last year from gun-related injuries. (Yes, you can still buy guns at Walmart.) It’s ironic that the Supreme Court is allegedly considering overturning Roe v. Wade (the right to choose abortion). It seems like protecting lives is only important before they exit the womb.

Richer: The minimum wage in the US is currently US$7.25 per hour. If you think that sounds bad, it’s worth noting it hasn’t increased since 2010. When adjusted for inflation, the minimum wage in the US is lower than it was in 1970.

Meanwhile, CEO wages have increased exponentially. The average CEO wage in the US is now 320 times more than what workers earn. In 1970, it was ‘only’ 21 times more than the average worker’s.

Unfortunately, this isn’t just about the disparity between CEOs and people working for minimum wage. The general rate of income inequality is increasing rapidly. Five families in the USA now have as much wealth as the bottom 50% of the population. It’s insane, and a lot of it can be tracked back to the narrative proselytising lower tax rates. Lower taxes, it was claimed, create jobs and growth, but all it really does is transfer wealth to the owners of capital. Few people know that the highest tax rate in the US was 94% in 1945. Today it is 37% and you need to earn over $500,000 before you hit that rate. Meanwhile, corporate tax rates are a mere 21%.

The effect of this isn’t just the hollowing out of things like education and healthcare. Income inequality is exacerbated which then creates a spiralling down effect. People can’t access resources for health and eduction, while the wealthy can, so the gap grows bigger.

All of this is happening at a time when the cost of living is increasing and the country is becoming more socially divided.

When the core tenets for a stable society of health, wealth and education are eroded from the bottom up, it rarely ends well. History says that it causes instability, infighting and eventual civil war. TL;DR: people come with pitchforks. I wouldn’t be surprised if the USA splits like the USSR did. Never before have we seen such an economic powerhouse so divided on both beliefs and the foundations that actually hold it together.

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Keep Thinking,

Steve.

Enlightened Loyalty

Posted on by Steve Sammartino

Loyalty in life matters. But one thing we should never be loyal to, is a corporation.

Corporate loyalty is one of the most foolish decisions we can make, simply because companies, aren’t real. They are a legal-financial construct invented by humans to literally remove human oriented risk. And we can be sure that despite what they say, a company will never be loyal to anyone inside it. The ‘thing’ can only be loyal to its corporate objectives. It’s designed that way on purpose.

But here is what we can do – be loyal to the people we meet inside them. That has the potential to be enduring. This has the potential to extend beyond the original corporate meeting place because it is between people.

One of the most important decisions we can make – is what to be loyal to. On this my advice is simple, be loyal to people, not things or market based constructs. The irony of course, is that the more we focus on human loyalty, the more the companies and market places we inhabit benefit.

Speaking of loyalty – This weeks Episode of The Rebound is all about Gamification & Loyalty. It’ll be shown on Channel 9 Nationally at 12.30pm. We are now in our 3rd season which is pretty cool.

I remember the first pitch meeting we had with Channel 9. I said that we think smart Australians want to watch something a little more educational than seeing strangers get married on an island or at first site. A risky move, but it worked. I was loyal to what I actually believe. And when it comes to pitching I always say that the audience believes, what you believe They can smell it – and there is nothing more compelling than self belief. And while, we still haven’t cracked prime time our audience was up 61% across season 2. So thanks for all who are tuning in.

The first 2 episodes have already run. Ep.1 was all about Data and Algorithms – with clear explanations and hacks to get them working for you. Ep.2 was all about the Freelancer, something close to my heart because I am one.

And if you haven’t had enough Sammatron – here’s a radio interview I did for Talking Finance (nerdy I know) about why Elon Musk literally can’t afford to buy twitter. Yes, you read that right. The world’s richest human with his $250 billion+ in net worth, can’t raise the cash. Nearly all of his wealth is in Tesla Stock, and he hasn’t got the $43 billion in cash needed to buy it, and he can’t access it either. You can listen in here to find out why. I speak at 23 min mark- a simple insight into how investment markets really work.

I actually posted this interview about Elon Musk not having the money to takeover Twitter – and the tweeting Taliban descended upon me with hate mail. Lol. It’s an interesting example of misdirected loyalty. Elon’s fans, or should I say acolytes, think that he can do no wrong. No doubt he is a genius who has changed the world, but I think it is about time that we kibosh the idea that the person with the most money is always correct. Wisdom isn’t a financial construct, and neither should loyalty be.

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Keep Thinking,

Steve

The Weirdness of Tech, Storytelling and Putin

Posted on by Steve Sammartino

The story you tell yourself determines your future.

Right now, horrible war crimes are being committed because of the story that Vladimir Putin has told himself. In his mind, he is a tzar who will reunify the old USSR, and will consequently go down in history as a great, powerful man. Though the validity of his story is questionable, we can be sure that the story he has told himself is the motivation behind the actions he has taken. Ultimately, it will define his future.

Stories are important. They are far more powerful than the truth. If we take a story to be true, then we’ll find ways to justify it, define it, and eventually act it out. As our minds think, eventually we become.

Now, let’s take the story of Elon Musk. No doubt – he is a genius, though he does act irrationally at times. He has certainly changed the world through electrifying transport and putting satellites into orbit. Musk has also made several stupid comments, accumulated US$40 million in fines for securities fraud and left in his wake a long list of broken promises, including putting 1 million robotaxis on the road by 2020. Today, he still can’t scale up to more than 750,000 cars a year, and there are exactly zero robotaxis on the road three years later. His promise of a Hyperloop is equally foolish when you realise he has basically rehashed an inferior version of a train.

But the Cult of Musk is stronger than the truth. Say a single negative word about him in any social forum, and his acolytes will attack you like a pack of wild dogs, accusing you of being a Luddite and not getting it. It doesn’t matter what the truth is. Musk’s story galvanises his fans with a real sense of religiosity. Recently I commented on a TikTok video featuring Musk proclaiming degrees are worthless and that you can learn anything without it. I agree – in many cases this is true. However, I made the mistake of posting a comment that I prefer my doctors to have medical degrees. I had 43 comments rain down on me that varied from accusing me of jealousy to claiming the entire medical industry is a scam. You should try it – click here and make a comment about an Elon tweet that doesn’t support his views, and you’ll see what I mean. There’s also a chance you’re reading this and thinking, ‘I thought Samma was into tech…. wow, I’m surprised’. Let me reiterate. I’m into science, humans flourishing and pointing out our foibles along the way. Storytelling is a powerful force that, like any technology, can be used to emancipate or fool people.

What’s most interesting is that it isn’t just individuals who can buy into a fantasy. We can have collective hallucinations. As I write this, the market value of Tesla is greater than the combined market value of the ten next biggest car companies. While Tesla had an early lead in EVs and autonomous vehicles, it’s now clear they have very little, if any, advantage. This is the financial value of story. I often say that Tesla is the world’s first trillion dollar story. If I had the choice to own either Tesla, or the ten next biggest companies that includes Ford, Toyota, GM, Daimler, BMW, Honda, and Volkswagen, I know what I’d choose. Without a question, it would be the ten auto manufacturers that collectively produce more than 50 million cars a year. The share market – which is meant to be a rational means of capital allocation – says Elon’s 705k annual production and ‘story’ is worth more.

Thought for the day: The story is always more profitable than the truth.

Now to you. What story do you tell yourself? The story of your capability, where you are going, and why you belong there? I tell my clients this all the time – they believe what you believe. The market looks to your story – the one you tell yourself first. By inference, this will the same story you are telling them, and often they put a value on that story.

Stories are what humanity buys into, simply because anything physical in nature starts as an idea or blueprint first. From building a house to putting a man on the moon. Our trajectory depends on our personal stories more than we give them credit for.

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Keep Thinking,

Steve.

You’re Not Ready

Posted on by Steve Sammartino

A Marketing Director once told me, “You’re not ready yet, Steve. You need another 12 to 18 months in your current role.”

I took it in good faith. The conversation was regarding my filling a Marketing Manager role, a step up the corporate ladder from where I was. Then the next week, it was announced the person who was taking the job came from sales and had zero brand marketing experience. That was when I learned what the Marketing Director really meant.

“We don’t want to give it to you, Steve. We like this other bloke more…but we’ll tell you something digestible for now.”

Whenever anyone tells you that you aren’t ready yet, it can mean a lot of things – but it has nothing to do with being ready. Why’s that? Because no one is ever ready for anything.

Before anyone is given a chance to shine in a new role, there must be a leap of faith from someone, somewhere. Inside corporations, a great myth is perpetuated by managers that workers win their roles based on qualifications and experience alone. Mostly, managers give opportunities to the people they like, who went to the same school, follow the same football team, wear the right clothes. Someone not too different to them. It’s rarely about competence. If the game of corporate snakes and ladders were about competence, there’d be far fewer instances of CEOs pocketing $10 million to go away quietly because they did a terrible job. The corporate game is very different because what powers its success, the infrastructure, already exists. Most managers are simply riding it.

I haven’t been ready for any of the important milestones and projects I’ve done in my life. But I worked it out as I went along. Unless we are talking about something serious like flying a plane, engineering bridges or performing surgery, being ready is a corporate hoax. Ninety nine times out of a hundred, what needs to be learned can only happen once you are actually doing it. The mistakes we make literally becomes the readiness requirement.

When I built this with Raul, I had no idea what I was doing.

When I wrote my first book, The Great Fragmentation, I had never done that before.

When I wrote the first scripts for The Rebound and appeared on the TV screen, I wasn’t ready.

And now, I’m not ready to 3D print a house with Tom – but I’m doing it anyway.

I have never been ready for anything, and neither will you. So don’t believe them, and don’t wait for it. If someone tells you are not ready yet – it is time to leave.

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Keep Thinking,

Steve.

Peak Facebook?

Posted on by Steve Sammartino

It’s been a bumpy start to the year for Mark Zuckerberg who lost a lazy $30b since ‘Meta’ tanked on the stock market .

I don’t think it is a stretch to say we are past “Peak Facebook”.

So far, the share price decline has been stubborn. Meta no longer has the most downloaded social media application (that crown goes to TikTok) and its abilities in laser-sharp micro-targeting have been curtailed by Apple’s recent privacy shifts. For the first time in its history, Facebook (Meta) has lost users. Since its peak market capitalisation of over $US1 trillion, Meta has lost almost 45 per cent of its market value and is now valued at $US561 billion. This is the biggest single drop in capitalisation of any stock in history – $US230 billion.

As the numbers are enormous, it’s easy to overlook how extraordinary this is. To give you some context – Meta’s loss since its peak is more than the value of BHP, the biggest company in Australia, at $US181 billion, or the combined value of NAB, ANZ, Westpac, Wesfarmers, Woolworths and Telstra.

It turns out investors can tolerate almost daily scandals including spread of misinformation, abuse of market power, threats to the democratic process, tacit support of anti-vax groups, facilitation of teen depression on Instagram and massive privacy incursions – but not an earnings miss.

That said, this has provided the market with an opportunity to recalibrate their viewpoint not only on Meta, but the wider Big Tech cohort.

It is becoming clear who the technology landlords are and who the tenants are. The smart play in this sector is analysing more than top line growth and turning your mind to structural shifts within the sector. It’s increasingly obvious that control is more important than reach and attention. From an investment perspective, structural shifts and access to customers are where we should focus our attention.

Amazon – Search and Advertising?

When we think of Amazon, we don’t think of advertising. However, for the first time ever in the earnings call, they separated out their advertising revenue. It came in at $US31 billion. This number is more than the combined advertising revenue for Twitter, Snapchat and Microsoft.

Let’s also not forget that the margins for this business would greatly exceed their traditional ecommerce business division. Running warehouses and shipping products is expensive – while putting ads on your site comes at near zero marginal cost. While the advertising earnings were only 7 per cent of Amazon’s revenue for 2021, it is deep in the purchasing funnel – right after consumers have searched what they want to buy, inside Amazon’s ecosystem. It’s hard to have a more powerful offer for brands wishing to sell something than being there at the moment of truth for the consumer. Amazon now has the advantage of owning a quasi-search for internet shopping, and they get to advertise on top of it.

On the other hand, Meta has a more indirect business model for advertising, rendered vulnerable by Apple’s new requirement that their users ‘opt in’ to tracking. This has an estimated cost of at least $US10 billion in revenue to Meta in 2022 alone. This move has impacted Meta’s ability to target consumers as accurately. It pushes them further out in the purchasing funnel.

That is just the start. We can expect Alphabet’s Android mobile operating system to move in a similar direction and get ahead of privacy regulation.

Rail Wars

The new battle in Big Tech isn’t about user base or engaging, addictive products – it’s about owning the rails of commerce. Google, Apple and Amazon are beginning to flex some muscle and leverage their structural advantage over Meta.

First, Apple gets to make the rules. Meta may have nearly 3 billion users, but Apple controls the devices 30 per cent of them use. Apple decides what information gets shared within their iOS ecosystem and its decisions can change the fortunes of apps overnight. Their brand positioning has always been one of privacy as a fundamental human right. It would be prudent to think that Apple’s structures within this realm will only strengthen and align with prevailing consumer and regulatory sentiment.

Both Amazon and Google are using search as a positive advertising mechanism. This is based on desire, rather than interruption. Facebook has historically relied on going deep into psychographics and behaviour profiling (now frustrated by privacy controls) and being compelled to worsen their platform experience because of their advertising business model.

In contrast, search-based advertising is based on direct and immediate consumer feedback, powered by consumer desire. The platforms Amazon and Google operate extremely close to the point of purchase. Amazon controls the audience inside their ‘store’, while Alphabet (Google’s parent) can respond to direct queries inside their maps, Android OS, searches and Chrome browser. Outside of Facebook marketplace and Instagram commerce, Meta is not proximate to the ‘moment of truth’. 

Meta faces two tough challenges. Despite the incredible reach of their platforms (2.9 billion users), Meta does not:

  1. Own the rails of commerce like other Big Tech firms do.
  2. Go deep into the purchasing funnel.

The most expensive shelf space in Coles and Woolworths is right next to the cash register, where we often see impulse purchase items. The cost of this real estate is justified because it’s where a purchase is about to take place – when we have our credit cards ready.

It’s also true that brands spend more on cooperative advertising directly with supermarkets (“trade spend”) than they do on brand messaging within consumer markets. If I type “treadmill” into Amazon or “new car finance” into Google, you can be sure I’m ready to buy. Being in a group about fitness on Facebook or following a retro Porsches page on Instagram could be more about hope than intent to purchase. In the supermarket of the internet, money will increasingly flow towards the point of purchase.

Facebook is where people congregate for socialising, news and entertainment – it’s not where they go to buy. While it is a great place to generate brand awareness and build associations, that’s going to be harder to achieve with privacy shifts and those who control the rails shutting them out. We are also entering a more competitive market for attention in social and entertainment realms.

The Metaverse Hallucination

Facebooks’ rebranding to Meta and subsequent investment in the metaverse is strategically the right path to take. Their investment in the metaverse – more than $US15 billion to date – could build out an ecosystem they own and control through their own device, the Oculus. It’s just unlikely to work as well as Mark Zuckerberg hopes. It already exists in a multitude of gaming contexts with well established players. Turns out having billions of dollars and yes people surrounding you can cause a person to lose touch with humanity.

The problem is that it’s already a hyper-competitive market, and Meta’s offering lacks the ‘reality’ that has been the core proposition of Facebook and social media generally. Social media is inextricably linked to what we do in the physical world. Despite the filters we add, it is a mirror for our lives and relies on real world connections. It builds connections and FOMO, while the metaverse forces people into wormholes.

Virtual reality (the metaverse, according to Meta) is the domain of games and fantasy. It’s hard to show off how great your life (and car, house, garden, holiday) is when it’s only pixels.

Even if Meta manages to pull off its metaverse miracle, virtual consumption will never rival actual consumption. For most people, their biggest expenses are food, transport, shelter and healthcare, which are unalterably physical.

Speaking of physical, success in the sector will compel Meta to get better at making hardware. The much-heralded Facebook Portal hasn’t exactly set the world on fire, with fewer than 0.02 per cent of their consumer base investing in one. In comparison, Oculus has fared a little better, with purchases by 2.4 per cent of Facebook users.

It may be that Meta has maximised what it can be – it has peaked. We an only hope.

Or maybe I’m wrong and Zuckerberg is such a brilliant strategist that he has deliberately stumbled to stave off threats of regulation and splitting up what is still the biggest audience any organisation has managed to garner in the history of Earth.

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Keep Thinking,

Steve.

Touch Down – Super Bowl hits & misses

Posted on by Steve Sammartino

It’s very difficult for standup comedians to maintain their edge once they become super stars. It’s not that they stop being funny people, or lose their stage mojo, it’s that they often lose touch with their audience. It’s hard to relate to ‘the people’ once you drive a Ferrari and live in a mansion. Their stories and anecdotes become distant, even foreign. The same thing happens to successful companies and it’s happening to Meta.

This week the Super Bowl happened in the USA. The capstone event of not just American Football, but advertising. At US$7 million for 30 seconds – it’s quite an investment. Despite US centricity, it also serves as a barometer for technology and the global economy. You can see all the ads here.

As expected we saw adverts for snacks, beer and automobiles. The latter was all about our all electric car future. In the US, electric cars are 9% of sales, yet they are getting close to 100% of the attention. By my reckoning, we’ll all be driving electric long before government regulations make it mandatory. There was even an advertisement for an electric car charger! In Australia alone, this install market is a AUD$40 billion opportunity (20m cars @ $2000 per charger). And yes, every car will have its own charger.

Dropping the ball

Big budgets doesn’t always translate to great stories. Two of the tech titans, Meta and Amazon, had terrible advertisements. Their ads felt like public service announcements of why we need to be suspicious about them. I’ll start with Meta. If you haven’t seen their Super Bowl advertisement already, watch this, and I’ll see you in 60 seconds….

Here’s my outtake:

“When the real world really blows – just sub into the metaverse”.

Is that a subliminal message from the Zuck himself? Is he admitting his contribution to the decline of civilisation? It seems his most loyal lieutenants didn’t have the courage to tell him he’s lost touch.

Now onto Uncle Jeff’s empire, Amazon. Their ad, which can be seen here was unironically called Mind Reader. It features Scarlett Johansson and Colin Jost using their Alexa. This one is kinda real, and even a little funny, but mostly unsettling. While the device can’t quite mind read yet, the biggest fear most people have about always-on, always-listening devices like Alexa is that the system is gathering far more personal information than we want. Another great antidote to buying what they are actually selling.

If you ever wanted a clear idea, then Coinbase delivered. While they are not about to win any story telling or creative awards for this piece, it was very clever. Running a floating QR code for 30 seconds at a cost of US$7 million has to be the most single minded marketing proposition of all time…. and people took action. It had a whopping 20 million hits within 1 minute. A twenty percent success ratio – unheard of in advertising in the modern era.

The Touchdown!

For me the touch down went to Salesforce. Their ad took a shot across the bow of their technology brethren. While every other tech firm and billionaire seems to be trying escape from the messiness of earth to mars or the metaverse – Salesforce had this message. Brilliant.

One of the most promising brand plays today is to tell people how and why you don’t act like big tech. There’s a real movement against them, and it’s gathering pace. It’s going to be a long war before we get back our data, our humanity and long needed regulation – but in the interim, not doing many of the things they do, and telling people about it can be a bankable strategy.

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Keep thinking,

Steve.

Is Crypto Gambling or Investing?

Posted on by Steve Sammartino

Cryptocurrencies have created many multimillionaires – even some billionaires. While this might seem like an opportunity for emancipation, I can’t help but think that the opposite is true.

Before I commence my diatribe, let me be clear: Cryptocurrencies are incredible. The technology underpinning them (like blockchain and DLT) is brilliant and has many use cases. It is here to stay. I believe all sovereign countries will move to their own cryptocurrencies, like US-crypto or AU-crypto. Of course, a few ‘indy’ currencies will survive like Bitcoin and Ethereum. My bet is they’ll eventually trade as a kind of digital commodity, like precious metals, oil or grains are today. The other 10,000+ crypto currencies will become the penny stocks of tomorrow.

Now to what I really think as an economist about crypto ‘investing’.

Speculation Is Inevitable

When fortunes are made seemingly overnight, FOMO is inevitable. This in turn leads to risky speculation. I wish I made bigger bets on cryptocurrency when I discussed it in my first book in 2014 and blogged about it here in 2015. It has risen 100 fold since then. While I made some gains (I’ve lost some coins too), it was pure luck. I was experimenting with the technology, rather than investing. But like any burgeoning technology, it must go through a speculative boom and bust before it can settle into the economic infrastructure.

Remember the dot com boom between 1995-2000? Any IPO touting the word ‘.com’ had investors lining up. Share prices of companies with neither assets nor customers, but armed with a loose idea of how they were going to change the world, skyrocketed. In five short years, the Nasdaq rose 570% (chart below). The bust started on March 11th in 2000. It didn’t get back to those highs for 15 long years.

It’s usually during these ‘down years’ that we sift out what the market really needs, leaving behind the frenzy created by opportunistic hucksters taking advantage of the human instinct to gamble.

Where is Crypto at now?

Bitcoin has lost around 37% of its value since November, and at one point was half its peak price. Cryptocurrencies have lost a combined $1.4 trillion in value. As brokers like to say, there is ‘blood on the floor’.

But as any crypto acolyte will tell you, this has happened before. Big drops are not uncommon. Their advice would be to buy on the dip. Not because there is any underlying economic reason. just because they saw a pattern last time. But as any sophisticated investor will tell you, it doesn’t mean that pattern will emerge next time.

No one really knows if the price will go to a million per Bitcoin, or just one dollar. Every day, we see crazy gains from at least one cryptocurrency. Today it was Fighter Shiba, which rose 858% in a single day. Tomorrow it will be a different cryptocurrency. When it comes to the future of crypto prices, people are just guessing. Guessing is not investing.

Scarcity is Not Enough

Sure, there will only ever be 21 million Bitcoins, but Fighter Shiba and every other crypto is scarce too. Scarcity is not a valid argument for investing. On its own, it doesn’t create value. Things of value need utility or yield. When you buy a stock of Apple, Alphabet or Amazon, their prices may well be depressed for a period, but it doesn’t stop people buying iPhones, searching or ordering online. These compnaies are not just financial constructs, they bear fruit. Likewise, It doesn’t matter what the currency of the day is, or becomes – they’ll trade in it.

If cryptocurrencies want to be a store of value or economic utility – then they can’t rise in perpetuity, they must stabilise at some point. If they don’t, they become a Ponzi scheme.

Currencies are Natural Monopolies

There are many cryptos aiming to be the currency of an industry sector – like energy, social media, data storage or logistics. But It doesn’t make sense to have lots of currencies. Currencies are what we call a natural monopoly. People need a single reference point to transact in, otherwise it’s just too complex.

We get paid in dollars – and we need know what something costs us, when we buy it, in the currency we earn. Just think of how confusing juggling multiple currencies is when you travel overseas. Believing we’ll end up with multiple cryptos is pure folly, because it doesn’t take into account human behaviour. Hundreds of years ago, regional banks around the world had their own currencies, as did small villages. But it became too complex once we started travelling and trading on a grander scale, so we reverted to precious metals and eventually fiat currencies. History matters.

The Youth Target

If you’re under the age of 30 as many of my readers are, I can see how crypto’s massive gains are attractive. It’s a chance to get in the game, to stick it to the man. We often hear how boomers stole the future and priced you out of the housing market. It’s understandable. But cryptos growth is unsustainable. The average per annum growth of both shares and property over hundreds of years is around 10%. Anything above that long term average is the anomaly, so we ought be wary.

Every Saturday the Australian Financial Review runs a full page advertisement from the currency exchange Crypto.com which says “Fortune Favours the Brave”. If you think it sounds more like gambling than thoughtful capital allocation, trust your instincts. The one thing we need to remember about exchanges and brokers of all sorts is that they make money when people are trading. It matters not to them whether prices are going up or down.

We can add to this gambling ethic the recent example of crypto exchanges sponsoring football teams around the world. AFL, NRL, Premier league, NFL – cryptos are the latest way to have a wager. Those encouraging it are well aware of where crypto fits in many young adults minds. So they went to where the gamblers are.

So, is it gambling or Investing?

My view is pretty clear. And the lesson is simple – unless you understand where you are putting your money and why, you are gambling.

There are many people who became wealthy through gambling. Maybe you want to take that risk, but unless you’re happy to lose what you play with, I wouldn’t go there.

Capital allocated to high risk assets should never exceed 5% of a balanced investment portfolio. Remember, for every single investment you lose your money on, you need 10 successful investments (10% ROI) to just get back to where you started. A sobering thought.

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Keep Thinking,

Steve.