There’s a pecking order when it comes to investing.
A hierarchy of opportunity.
It’s a pyramid of power, carved out in the stone of regulation.
And like in any hierarchy, you had better know your place.
I’ll shortly show you what I mean with a famous example from last year.
Because only by knowing how the system works now, can you understand why a certain asset boom is so unusual.
Most unusual indeed.
And to top it all off, the repercussions of its very existence are changing the game for the investing booms of the future.
It’s disrupting the world of venture capital already.
When ‘initial’ means ‘getting in last’
The example I’ll use is Snapchat [NYSE:SNAP].
You’ll probably recall the investment frenzy that was the Snapchat Initial Public Offering (IPO) last year.
It was the first chance for the general public to get in on one of the hottest stocks of the past few years.
Interest was huge.
And the stock finished its first day 44% up at $24.48 a share.
But this ‘initial’ listing on the stock exchange was actually the 10th time the company had raised money from investors since its founding in 2011.
So, before you or I had the chance to invest, nine previous rounds of investment had taken place. Rounds that weren’t open to us.
Only to the select few who qualified.
The so-called sophisticated investors of the venture capital world.
This isn’t just an expedient decision by the company to raise money off a few rich folks, rather than a lot of poorer folk.
Though that obviously plays a part.
It’s actually entrenched in the regulatory laws of most major countries.
To raise capital from poor old retail investors is a hazardous, costly and impractical way of raising money.
Sure, you can be an early adopter of a new product. But you’ll never get the chance to be an early investor.
Sorry, it’s for your own good. You can’t be trusted to be able to make wise decisions here.
Of course, you’re allowed to gamble incessantly on sports, play the weekly lottery…you can even mortgage your house and give it to James Packer by playing pokies seven days per week.
But to make an educated decision to invest in a new venture?
No, you’re just not capable I’m afraid.
Look I do realise that some regulations are needed. And they’re in place to save some people from themselves.
Stupid, greedy or just plain unlucky people will always lose money somehow.
And investing in a new business is a very risky endeavour for anyone of course.
But it was nine rounds before your average Joe Blow got the chance to invest a cent in Snapchat. Nine chances to profit from those early gains. And to profit by selling to those latecomers who had to wait for the IPO.
Surely an earlier opportunity could have been made available to the rest of us?
Incidentally, today Snapchat is trading at $13.20.
That’s almost 50% down from that first day frenzy.
There are no regulations in place to stop you from losing your shirt there, I note…
The big lie
I explain this example to demonstrate the pecking order of investing. This is the regulated, proper process that all investment themes, trends and companies go through.
It’s only when an investment goes ‘public’ that it’s deemed ‘safe’ enough for you or I to invest in it.
But the facts don’t support this so-called protective regulatory regime.
In fact, most IPOs occur at the top of market booms, just at the worst time to invest.
[Click to enlarge]
Can you see the two of the biggest boom years for IPOs?
The top of the tech boom in 1999–2000. And then in 2007, just before the GFC, we saw another spike.
Unlucky for you if you’d got in any of these IPOs in 2000…
Biggest year-end 2000 flops
|1||Jeremy’s Microbatch JMIC||$6||-99.8%|
|3||HealthGate Data HGAT, +900.00%||$11||-98.3%|
|4||Varsity Group VSTY||$10||-98.1%|
|5||ImproveNet IMPV, +0.57%||$16||-97.6%|
|6||Talisman Enterprises BATT, -0.26%||$5||-97.5%|
|8||Uproar UPRO, +1.23%||$33.88||-97.1%|
|10||Opus360 OPUS, -60.00%||$10||-96.9%|
|11||Savvis Comm. SVVS||$24||-96.3%|
You can safely conclude that regulations that govern when you are able to invest aren’t really so you don’t lose money.
In fact, the system is set up so that you aren’t allowed to invest in the early stages of the biggest opportunities.
You have to be a sophisticated investor. That is a person rich enough to get a chance to make gains.
This is a racket, pure and simple. A regulatory means of preserving a monopoly on the best investing opportunities.
And it’s been set in stone for decades.
The crypto boom they didn’t see coming
What made the cryptocurrency boom so unusual was that from day one anyone could buy bitcoin.
There were no restrictions.
Of course, not many people did. It was a highly innovative, technologically obscure piece of cryptography that you probably didn’t hear about until much later.
But that’s beside the point.
There was nothing and no one to stop you buying a bitcoin or mining a bitcoin from day dot.
And some people did.
Some of the lucky ones actually kept them and are super wealthy today. Many others threw them away on old computers, lost private keys or generally forgot all about them.
Or, famously, spent 10,000 bitcoins on a pizza…
After all who could have seen how it would all turn out?
But the first big difference was the complete access. A stake in a technology with 100% access to anyone who was interested.
As things developed and word got out, you’d have thought the big wigs of the investing world would have started investing?
And a minority did. Tech investors like Andreesen-Horowitz, Tim Draper and Sequoia dipped their toes in a few projects.
But even these masters of the universe didn’t know how big this would get.
Most other venture capitalists plain ignored it.
The old money firms like Goldman Sachs didn’t even acknowledge it. It was just ‘funny e-money for drug dealing and money laundering.’
It wasn’t a threat, it wasn’t an opportunity. It was just a bunch of crypto-anarchists who thought they could change the world. A world the big investors happened to love just the way it was.
There was ‘real’ money to be had elsewhere…
But the rest of us weren’t so happy with the current system.
At first it was the simple things…
Why should it take days to send money to someone? Why should I pay high fees to send money abroad? Why can’t banking be as easy and intuitive as Facebook?
Then as we delved deeper, we saw the broader repercussions. Remember, in a post-GFC world of big business bailouts and a rise in general inequality, the motivation for understanding the system was high.
Decentralisation of power, trustless trust, an ability to disrupt the cosy cartel of government and big banking, censorship resistance…
These were concepts that resonated. Plus, the underlying blockchain technology was super interesting in itself.
So, we started buying cryptocurrencies. Slowly at first. It wasn’t easy and there were many setbacks.
But then in 2017 a tipping point was hit. And we — the general public — went mad on them. Prices went gangbusters.
The old money, the JP Morgans, the big investment funds, the Warren Buffets, were all left blindsided.
It was a boom happening without them.
The usual hierarchy of investing, the process that Snapchat went through earlier, the process designed to give the elite first access, wasn’t followed.
Don’t let them back in
So, instead we’re at a point where the investing elite are trying to regain control. And they’re using their full arsenal to do it.
Calling for regulations, planting crypto scare stories, making public pronouncements on the imminent crypto crash.
I’m sure this will sound paranoid, but in the unregulated world of crypto I’m sure manipulation is going on too. Buying and selling to create waves of fear.
I’m sure some of these big funds still don’t get it.
But a lot of those saying and doing these things do get it. And they’re sneakily buying in when they can.
Their interests are in shaking out the general public and regaining control of this immense opportunity in time for the next phase of the crypto boom.
The number of cryptocurrency hedge funds launching is growing every day. Again, these are investment vehicles deemed ‘too risky’ for you or I to invest in.
Only ‘sophisticated’ people please.
Google it for yourself. See the number of ex-fund managers getting into crypto investing right now. It’s huge.
So, don’t get shaken out, and don’t fall prey to the fear. You are part of a most unusual boom. A boom where you’re front running your betters for once, instead of the other way around.
My advice is this. Stay calm. Hold. Ignore the noise.
And retain your stake in potentially the biggest shakeup so far to the investing world as we know it.
It’s not without risk of course. But remember, when the risk is gone, the opportunity is too.
Editor, Money Morning