The Musk Factor, Gamestop & the case for DeFi

February 10, 2021

Welcome to the early February edition of Crypto Decrypted. I had intended a few other topics for this update however, as he is wont to do, it looks like I’ve been upstaged by Elon Musk, so let’s start there.

Musk Makes a Move

While it’s been no surprise that Musk has been showing an interest in bitcoin, particularly as evidenced when viewing this tweets with MicroStrategy CEO Michael Saylor, he unveiled a shocker to many Monday morning with his announcement that Tesla had just acquired $1.5B (billion!) in bitcoin. That’s a lot of bitcoin.  Bitcoin of course reacted by immediately jumping 20% and why not?  Let’s look at this dynamic for a moment.

Tesla’s jumping in the game is an “all in” approach that makes it not only increasingly safe for other companies to jump into the pool, it is another company participating in what seems to be becoming a trend.  It’s quite possible that before too long large conglomerates are going to look irresponsible if they don’t have bitcoin in their treasury. Pundits agreed, as noted in this Business Insider article.

Musk is following the precedent set by Saylor who basically removed all question, confusion and doubt that may be plaguing other executives by publishing the full MicroStrategy corporate acquisition playbook at their worldwide conference this week.  This playbook details their approach to bitcoin, ranging from how to address board concerns to how to maximize position size by leveraging corporate equity to everything in between.

This is one of the major differences between this bull run and others. The price of bitcoin is already skyrocketing based on the institutional interest at hand.  What happens when the rest of the Fortune 500 jump in?  Demand grows. Supply remains constrained.  Price… well…  you get the picture.

Apple, it is speculated by RBC, would be wise to not get left behind.  Will they be the next giant in?  It would make sense for a lot of reasons according to the analysts in this Bloomberg article.

Last but certainly not least, Tesla didn’t just acquire $1.5B in bitcoin, they went on to announce that they would accept bitcoin as payment, opening up a very public and very visible channel for real world consumer use on a significant level.  So their play isn’t just acquisition of the asset. It is forwarding adoption of the asset. Incredible.


GameStop and the case for DeFi

Of course, this was also a time of David v. Goliath as the reddit community of WallStreetBets decided they would support some of their favorite – and languishing – companies.  The first of these was GameStop, who’s stock soared to a peak of almost 1600% before coming back down to Earth.

This is a case where a bunch of individual investors all picked a company, committed as a group to buy and, as a community, drove the stock price higher and higher.  Wall street didn’t particularly care for this as funds such as Melvin Capital were shorting the stock, which means that the folks at Melvin were expecting the price to go lower, not higher.  When it went higher, they were forced to liquidate their positions at a loss.  In the case of Melvin specifically, they experienced a 53% loss of value resulting in billions of dollars of loss to their fund in January (and people say crypto is volatile.)

This gets worse however – and the point of this story is what happened next. Exchanges like Robin Hood, who have positioned themselves as champions of the little guy, unilaterally minimized or completely prohibited trading of GameStop stock.  Imagine if you had bought a stock at $50, it was now $400, and you wanted to sell it but your broker would not let you do so.  This is a little like playing baseball but the umpire has decided that the batter has to hit the ball but does not get to use a bat.

In this case, a centralized entity (Robin Hood) exercised control over all constituents (the traders) and limited their ability to participate in a market. Any time you have a counterparty that controls the playing field this is a risk that is taken and, subsequently, many of the traders could not exit their trades and could not realize the benefit of a simple “by low, sell high” strategy.  This is not the first time in the world of finance that something like this has happed.

Yes, there is a crypto answer to this.  It is decentralized finance (DeFi).  Bitcoin was created as an answer to the 2008 financial crisis.  Bitcoin, by design, minimizes financial manipulation by being a self-sovereign currency. There’s no one entity controlling it.  DeFi, likewise, is the world of financial instruments that also does not have any central entity controlling it.  It is democratized, if you will.  DeFi allows individuals to be on a level playing field when making their fiscal investments and, importantly to not be subject to being restricted by companies, individuals or organizations who don’t like the way a game is unfolding.

Certainly DeFi is a young industry. It is not perfect yet and we have a long way to go.  In the ‘90s when we were all using dial up modems to access the internet we had a long way to go too, but look how far we’ve come.  This is the path that’s in front of us with all of crypto, and this is why we see DeFi booming now. It’s clear to me that the folks at WallStreetBets have shown us why democratized finance will have a much needed place in our future.

In Closing

Bitcoin is booming. DeFi is booming. Crypto is booming.  All as an answer to traditional systems and markets that are subject to significant weaknesses and manipulation. This is “why crypto”.  It is at the heart of the change that’s occurring which is, in turn, driving this bull run. I suspect we’re going to see more and more examples of this as the months and years go on and, please remember that from our perspective, we’re still in the early stages of this predicted bull run which is being fueled by this need for change.

Until next time, be well, stay safe, and, of course, we’ll continue to Decrypt: Crypto for you!

About the author James Diorio

James is a Principal and Chief Executive Officer of Tradecraft Capital.