Easy, Breezy, Beautiful, FTX
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News
It would be disingenuous to dive into this week’s updates without acknowledging the concerning news surrounding Russia’s ongoing invasion of Ukraine and the needless violence & civilian casualties that are mounting as a result. My thoughts & prayers are with all those affected by this crisis & those in charge of protecting freedom in Europe & around the globe. News like this makes me realize how privileged we all are to concern ourselves with things like the plumbing & evolution of free markets in the developed world.
With that, let’s get to it…
FTX takes aim at the $300 billion luxury goods market and hires a beauty entrepreneur to head the push: I’ve recently become fascinated by the seemingly massive public image gap between the CEOs of Coinbase & FTX. Coinbase CEO Brian Armstrong has, by most standards, a rough Twitter resume to show for himself. The two top examples I’ll point out include a long thread about “sketchy behavior” at the SEC in response to their blocking of a Coinbase lending product that only spurred the agency to tighten rules on the exchange even further:
The second example came when Armstrong tweeted about his company’s process to create & run their QR Code Super Bowl ad, only to be up-staged by a PR agency CEO who accused Armstrong of stealing their idea:
People love to hate on Armstrong, viewing him as a rich, comfortable & tone-deaf incumbent waiting to be disrupted.
Compare this with Sam Bankman-Fried, whose exchange can seemingly do no wrong as it sails from strength to strength on its way to a $32 billion valuation, rivaling Coinbase itself. Each new FTX announcement seems to expand the boundaries of what an exchange is capable of, as it signs new nine-figure sponsorship deals, plans expansions into stock & US derivatives trading & even launches its own gaming unit to support the buildout of Web3 entertainment.
FTX’s latest announcement - the pursuit of luxury brand partnerships with the hiring of fashion entrepreneur Lauren Platt - adds yet another angle of conversion for the crypto & NFT space. Platt’s role will focus on two primary objectives - helping wealthy crypto natives explore ways to enjoy luxury items in the digital space and attracting non-crypto luxury brands & consumers to their ecosystem.
I have mixed feelings about this announcement’s impact on FTX & crypto as a whole. The optimist in me sees the value of attracting high net worth individuals into crypto & giving them more opportunities to spend money & pay transaction fees. Crypto & NFTs in particular are certainly redefining the idea of art & fashion in the digital age, and this expansion may simply be a forward-thinking manifestation of this movement.
The pessimist in me sees this as another headline-grabbing move to help FTX raise money at inflated valuations without connecting it to serious long term value. The idea of a “digital luxury good” is a very nascent concept that I’m not sure an exchange like FTX should be focused on. To me the most popular example of a digital luxury good is a Bored Ape Yacht Club NFT, which comes with its fair share of wealth & status symbols but also with populist pushback & controversy. There certainly could be a lucrative future in store for digital luxury that FTX may find itself ready to capture, but that future isn't extremely clear to me in the short or even medium term.
We've been hearing a lot of discussion about the widening valuation gap between public & private companies across all industries, and I think the Coinbase/FTX dichotomy serves as a perfect example. Coinbase has lost nearly half its value since going public as investors scrutinize its long term growth strategy & short term plans to retain customers. Meanwhile, FTX has seen its valuation reach new record highs as funds like Softbank, Tiger Global & a long list of others continue to throw money at SBF's feet despite soft crypto volumes & intense competition. Given the amount of money in FTX's coffers after all the recent fundraises, we can rest assured the exchange will have plenty of firepower to see if its gaming & luxury brand investments do indeed pay off.
Himalaya yogi ran India's top bourse as puppet master, regulator says: I haven't normally covered Indian stock exchanges in this newsletter, but I want to bring one related story up because it's too crazy to ignore.
The National Stock Exchange of India (NSE) is the country's largest exchange by volume & market cap with over $3 trillion of listings to its name. While preparing to go public later this year, exchange officials unveiled some startling information that has caused regulators to launch a broad investigation into the company. Former NSE CEO Chitra Ramakrishna reportedly shared large amounts of confidential NSE data, including financial projections, board agendas & strategy documents with a spiritual guru in the Himalayas. This wasn't a one-time thing either - emails & other internal documents show Ramakrishna consulting with this guru for as many as 20 years since helping found the exchange in the 1990s. Regulators have gone so far as to call Ramakrishna a "puppet" of this Himalayan guru, who ran the exchange behind the scenes. What's worse, further evidence points to NSE's board & management team being aware of Ramakrishna's mentor & hiding the situation from outside parties. A full-blown yogi CEO coverup!
To put this scandal in perspective, imagine if Terry Duffy of the CME Group or incoming NYSE President Lynn Martin paid weekly visits to unknown spiritual mentors for direct corporate & business advice for twenty years while in power. Not only would it be a breach of their fiduciary duty to shareholders, it would have the potential to affect every trader & listed company who interacts with the exchange. Indian regulators are taking the situation very seriously as a result, and for good reason.
NSE's IPO has been put on hold while the scandal is disentangled. Who knew one Himalayan yogi could have such an impact on the financial market of one of the world’s largest countries!
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Other Stories I’m Reading
Intercontinental Exchange Announces Strategic Investment in tZERO Group, Inc
Ken Griffin Op-Ed on Russian Sanctions
CME Group Announces Senior Leadership Changes
Ukraine invasion sends volumes surging on Chicago's commodity exchanges
NYSE Chair Sharon Bowen Has Never Been Shy About Making History
Chart Of The Week
As if war in Europe, volatile markets & broad macro uncertainty weren’t enough, exchange earnings season finally came to a close this week when Coinbase reported fourth quarter results. Revenue & EPS beat analyst expectations driven by an uptick in retail revenue capture & trading volumes as crypto activity showed strength industry-wide. Although still a tiny fraction of overall revenue, subscription products had a good Q4 showing too - custody & staking revenue grew more than 10x YoY to a combined ~$150 million quarterly run-rate.
While 2021 results were undeniably stellar, Coinbase’s outlook for 2022 left shareholders wanting. Crypto volumes have dipped substantially so far YTD, no concrete timelines were shared around Coinbase’s future NFT exchange launch & marketing expenses continue to grow as a percentage of revenue. Given the uncontrollable & volatile nature of crypto trading, Coinbase gave extremely wide guidance ranges when it came to active users & potential volumes going forward - our guess is as good as theirs when it comes to the transaction business. Shares are down in pre-market as of this writing.
I continue to avoid owning Coinbase shares for the time being, but always keep the door open for a potential long position if volumes start to show signs of life. That’s really all a Coinbase thesis comes down to at this point in their life - taking a view on the potential direction of future industry volumes, judging the odds of a resurgence in retail interest, and profiting when sentiment catches up. A company with this much volatility & potential earnings power at the same time is always worth watching, if at least with a fair amount of caution:
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, SPGI, NDAQ and VIRT. I am also long Solana.