Crypto and Cannabis Are the Perfect Post-Crisis Bubbles
(Bloomberg Businessweek) -- The economist John Maynard Keynes wrote: “The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.”
Ever since the crisis, the message to investors has been to embrace the “intolerably boring” style: Index. Rebalance. Diversify. Rebalance again. Reduce your fees. And don’t be so foolish as to think that you, sitting at home, could ever hope to win by picking individual stocks. Investors who have internalized this message have done phenomenally well in the post-crisis years, amid a long and steady—even dull—bull market.
But the gambling instinct can be repressed for only so long. And lately we’ve seen the emergence of strange new bubbles. And, yes, I’m talking about crypto and cannabis. The wild trading in shares of Canadian marijuana company Tilray Inc. in September—in which its market value briefly exceeded that of American Airlines Group Inc.—felt a lot like last year’s Bitcoin frenzy. Despite their different paths, the crypto and cannabis bubbles are unmistakable siblings. Spend a few minutes on Reddit pages devoted to Bitcoin, cannabis, or trading, and you can see the overlap and similarities of the communities. According to TD Ameritrade Inc., trading in pot stocks is overwhelmingly done by millennial-aged males. The stats for crypto look the same.
To understand these bubbles, it helps to compare and contrast them to what we saw in the late 1990s. People call it the dot-com bubble, but it was so much more than that. It was really an optimism bubble. Everything seemed to be going right in those days. People believed peace was about to break out in the Middle East and that China’s entry into the World Trade Organization would begin an inevitable transition toward freedom and democracy. The Segway was going to revolutionize how people got around cities. People didn’t just pile into tech stocks. They piled into everything. Another hot area was fuel cell companies, with speculators betting on an imminent era of zero-pollution vehicles. (I know this because I was one of them.)
The ultimate emblem of the dot-com bubble was not the Pets.com puppet, or Henry Blodget’s Amazon call, or the disastrous AOL-Time Warner merger. No, the ultimate emblem of the bubble was a small penny stock called Uniprime Capital Acceptance, which owned a car dealership in Las Vegas. One summer day in 1999, Uniprime put out a press release claiming that it had discovered—I kid you not—a cure for AIDS. Of course, people were skeptical, but hey, it was the ’90s and anything seemed possible ... so maybe one of its employees really had discovered an AIDS cure? The stock soared. Spoiler alert: It had not found an AIDS cure, and the president of the company got arrested for fraud.
Now contrast this with crypto. This is a market not born of optimism and dreams of a Lamborghini in every driveway, but of pessimism and mistrust. It first sprang to life a decade ago while the world was collapsing. In the code that got Bitcoin started—known as the genesis block—its pseudonymous creator Satoshi Nakamoto inscribed: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Since then, Bitcoin has taken a strange route toward respectability, from cypherpunks to online drug dealers to angry anti-Fed neo-goldbug types to Wall Street. When Wall Street finally arrived at the party, it was one of the last to show up. Bitcoin peaked the very week futures on it were launched last December. Of course, along the way, a few thousand other cryptocurrencies also showed up, hoping to cash in.
The Bitcoin frenzy moved in the opposite direction from the housing bubble. In The Big Short, the ultimate tell that housing was going to crash was the scene where a stripper was talking about her real estate speculation. There were stories about strippers accepting Bitcoin all the way back in 2012. When they make a movie about Bitcoin, the stripper will realize Bitcoin is peaking when a Wall Street client starts talking about launching a crypto hedge fund.
The crypto bubble burst, but there are still many believers, and many players in the industry are hoping these currencies can get a haircut, put on a suit, and collect billions of dollars in Wall Street money. And maybe they will. But at its core, there’s an inherent contradiction, because crypto started as a rejection of all that. Cryptography allows Person A to send Person B a message without Person C having any knowledge of what’s going on. Thanks to Satoshi, now the same can be done for money. The entire premise was that banks would no longer be needed to mediate transactions, and no one would be in a position to say what types of transactions are allowed. That’s inherently subversive, and no amount of futures, ETFs, or “institutional custodial solutions” can alter that fact.
So now to marijuana, which has always been associated with counterculture and degeneracy. There’s no need for a full history lesson here, but the path to mainstream respectability was a little bit different. Although activists worked for years on marijuana legalization, it feels like a switch was suddenly flipped. One day pot dealers were being arrested on the street. The next day a totally different set of dealers got to list on the Nasdaq. The Tilray board of directors looks about as counterculture as a branch of Re/Max agents.
The dark social mood of the post-crisis years may have helped catalyze the rise of cannabis. Peter Atwater, president of Financial Insyghts, which looks at markets through the lens of bigger societal trends, wrote in an email that both crypto and cannabis contain simultaneous elements of “fear and greed” and they’re both inherently anti-Establishment. Atwater also sent me a 2013 research report on attitudes about marijuana from the Socionomics Institute, a group associated with the controversial investment theorist Robert Prechter. The report argues that support for marijuana legalization has historically risen in America during periods of social tension. The percentage of people who say marijuana should be legal has absolutely soared since the financial crisis.
Just like with crypto, there’s been a party going on, and the traditional Wall Street and media gatekeepers are getting in late. David Greenwald is a former music journalist who’s now a web developer and cannabis stock trader in Oregon. He told me via email that he started learning about marijuana stocks after a Google search took him to the Reddit pages r/Weedstocks and r/thecannalysts. On the latter, people post breakdowns of the business models and finances of the various publicly traded pot companies that are as in-depth as many Wall Street research reports. “There are folks who have spreadsheets on which producers will have how many kilograms ready for sale, what their supply deals are,” writes Greenwald.
Reddit plays an outsize part in both the crypto and cannabis stories. Part of the reason Bitcoin split into two currencies last year—Bitcoin and Bitcoin Cash—was the claim that moderators on the popular r/Bitcoin page were censoring certain viewpoints on how Bitcoin should scale. To people outside the community, that would seem like the pettiest drama in the world, but one Bitcoin sect went ahead and made a whole new currency because of it.
Aaron Lammer happens to host both a podcast on crypto called Coin Talk and one on marijuana called Stoner, so I asked him about the overlap between the two worlds. First, he wanted to clarify that his podcast is about enjoying weed, not speculation. That said, he told me in an online chat he does follow cannabis penny stocks. It’s a murky world. “I’ve never seen a stock that matched a product I’ve seen for sale,” he says. “I don’t really understand what any of the companies do, which makes them a lot like shitcoins.” “Shitcoins” is the crypto pejorative for tiny coins nobody will ever use, but which people like to gamble on.
So here you have these two bubbles, with a lot in common, coming back to back. But why now? If there were an easy explanation for why bubbles emerge, anyone could get rich. But there are some general rules. You need a fantastic story, which both crypto and cannabis have. One’s disrupting finance and big tech; the other’s a gigantic new market rapidly becoming legal around the world. You also need the supply of investable assets to be small, so there’s a huge mismatch between the great story and what investors can actually buy.
That mismatch between demand and supply for internet stocks created some pretty hilarious situations in the late ’90s. So thirsty were people to buy into anything dot-com adjacent that shares of K-Tel International Inc. (the maker of corny retro compilation albums) rose tenfold in 1998 just because the company said it was going to start selling its CDs online. Eventually there was a tidal wave of IPOs in 1999. Supply caught up with demand, and the bubble soon came to an end. In 2017 the initial coin offering explosion may have helped kill the crypto bubble, when suddenly there were more coins to buy than anyone could count. There were also tons of forks of Bitcoin—basically, new versions—including Bitcoin Cash, Bitcoin Gold, Bitcoin Silver, Bitcoin Faith, Bitcoin World, Bitcoin Private, United Bitcoin, Bitcoin God (seriously), Lightning Bitcoin, Bitcoin Diamond, and dozens more.
With cannabis, there are just a handful of companies available to invest in, especially if you live in the U.S. If the market stays hot, though, there’s no doubt we’ll see a wave of IPOs and secondary offerings and spinouts from existing companies. Plus, we’ll see opportunistic pivots—press releases from companies saying, “Hey! We’re a cannabis company now.” You almost have to feel sorry for (the former) Long Island Iced Tea Corp., the beverage company that bizarrely pivoted to blockchain at the very peak of the crypto hype last December. If it had waited only a few months, it could’ve announced some CBD-infused drink, and that might have made some business sense.
And then there’s that long dormant urge to gamble. When I asked Greenwald why he both invests in and trades cannabis stocks, he was crystal clear: “The answer is volatility.” The stocks can go up 10 percent or 20 percent in a day. Of course, they can crash, too. If you’re a disciplined investor, volatility is a threat, because it plays with your emotions and tempts you to make bad decisions. But if you’re a trader or gambler, and you’re looking for action, volatility is an asset. And these days it’s a rather scarce asset. The years 2017 and 2018 have been among the least volatile for the market on record.
Probably the most visible advocate for cannabis, both as an investment opportunity and for its medical benefits, has been Todd Harrison of CB1 Capital. Harrison first got interested in the space after 9/11. He was working at a hedge fund in the vicinity of the Twin Towers when the attack happened, and the ensuing period left him with PTSD. Mainstream therapies weren’t helping. So he went down the rabbit hole, learning about the history of the war on marijuana, and what he says is the government’s long-term effort to suppress the medical research on it. He points out the heavy racial component in the war on drugs. The government has “blood on its hands,” he told me.
Ultimately, he sees this market going to $2 trillion to $3 trillion, but says that the current uncertain legal landscape makes it very hard for most investment institutions to take advantage of the opportunity. Cannabis is, he says, “the only time I’ve ever seen in my 30 years on Wall Street where individuals can front-run institutions.” It was at that moment talking to Harrison that I realized the story with the cannabis boom is far more gripping than the banal observation that a new, legal market is opening up. Both crypto and cannabis have the same meta-story about getting back at corrupt elites. Stick it to big businessmen, with their war on hemp. Stick it to ineffective mainstream medicine. Stick it to central bankers degrading the value of your dollars. Stick it to bankers and their bailouts at taxpayer expense. Stick it to the censors. Stick it to Richard Nixon. Stick it to Jeff Sessions. Stick it to the racist prison-industrial complex.
And the cherry on top with both, the believers will tell you, is that thanks to the current regulatory black hole, there’s a beautiful opportunity to get in now and make Wall Street the last bag holder. Psychologically, at least, crypto and cannabis are the perfect trades for the post-crisis era.
©2018 Bloomberg L.P.