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Named after the quirky breed of Japanese hunting dogs, Shiba Inu Coin (SHIB-USD) has surged from $3 billion in market cap to over $30 billion in the span of a few weeks. Like many altcoins, Shiba is priced at a fraction of a penny, making it easier to quote in terms of its market cap than price, unless you have a calculator handy at all times.
Shiba Inu rose to prominence through a clever maneuver- the creators sent half the supply (worth over a billion dollars) of the entire coin to Vitalek Buterin, co-founder of Ethereum (ETH-USD). At the time, Buterin was stuck in Singapore due to coronavirus restrictions, and the Shiba Inu creators had sent the coins to his main wallet, which incidentally also has over $1 billion in Ethereum in it. This immediately raised some potential red flags, but once Buterin and his team made sure the gift wasn’t some trick to steal his Ethereum holdings, they decided to burn 90% of the gift to avoid flooding the market and gave the remaining billion or so in SHIB-USD to charity.
On cue, TikTokers and YouTubers have called for Shiba Inu to hit 1 cent (with their customary all-caps video titles and rocket ship emojis), which would be a nearly 169x increase from the current price and a $5 trillion market cap. I think we can safely discount this scenario, but the peak of the Dogecoin frenzy in May reached a little over $90 billion in market cap, which is 3x the current market cap and a more reasonable possibility for SHIB-USD. Coinbase (COIN) began to allow Shiba Inu trading in September, which should put some floor on the demand for the coin in the short run. In the long run, most altcoins aren’t going to amount to much, but the tremendous volatility gives you the optionality to sell for much more than you invested in a short period of time. Furthermore, academic research shows that assets with positive momentum tend to keep going up, the trick being to sell them when they stop going up.
Fear of missing out (“FOMO”) is a real thing, and the world seems upside down right now. Friends of friends who do little but drink and smoke all day are racking up multiple years’ salary speculating on meme stocks and crypto, laughing at why anyone would work for a living. Unless this time is truly different, the speculative frenzy of 2020-2021 will eventually end the way that all other frenzies have, with the speculators getting crushed in the end and running out of money and fraud eventually getting exposed as the business cycle turns down. As a long-term investor, you shouldn’t worry about this because, in many ways, the crazy speculation in certain areas of the economy is creating opportunities in areas that are starved for capital, such as in international stocks, small-cap value, and energy companies.
As far as speculative bubbles go, altcoins are pretty harmless. Unlike the well-intending people currently getting in bidding wars over 5,000-square-foot homes in America’s deserts and swamps, retail investors in crypto generally do not borrow money to trade. If you were on the hook for a million-dollar mortgage for a house in Phoenix or Las Vegas in 2008, the feeling would have been terrible because you traded away years of your future labor for an asset with hundreds of thousands of dollars in negative equity. At the poker table of crypto, the stakes are much lower. Many investors got into crypto by investing their entertainment budgets with nowhere to go during lockdowns. I’d say that speculating on crypto is fine, provided the stakes are reasonable and that you choose coins without obvious scams or inflation.
I believe there is one catalyst that can drive the price of Shiba Inu up a lot, which is if Robinhood (HOOD) allows customers to trade the coin. The float of Shiba Inu is fairly tight, so if Robinhood customers are allowed to buy it, the coin will likely skyrocket. This may or may not happen-I would guess that regulators probably are not too keen for Robinhood to be at the center of yet another meme-based speculative frenzy, but it’s not like regulatory pressure has stopped Robinhood from doing what it has wanted to in the past with crypto. I don’t personally have any Shiba Inu, but I may buy a little if Robinhood indicates they will allow trading in it. The main risk worth monitoring is the so-called Whale Wallet, someone who has over $2 billion in SHIB-USD who might be looking to sell. People who studied finance in school I think tend to study these sorts of things and get stressed out when assets get mispriced, but people who have studied economics and history can laugh about it as just another episode of people acting crazy.
Dogecoin (DOGE-USD) has been a poster child for some of the crazier excesses in crypto over the last year, and SHIB-USD is basically another Dogecoin. There are some important differences-Dogecoin has built-in 4-5% annual inflation, while Shiba Inu does not appear to have any inflation, and Shiba Inu runs on the Ethereum platform.
In the long run, I don’t see a whole lot of value for Shiba Inu. There are over 10,000 cryptocurrencies that have been created over the past decade, and the majority of them have no long-term value. By contrast, there are a few dozen precious & industrial metals in existence. There are only a handful of major fiat currencies. If you study history, people making their own currencies and speculative bubbles forming is not at all a new trend. Shortly after the American colonists founded Boston in the 1600s, they went to work minting their own currency, backdating it a few years in the hopes Parliament wouldn’t find out. They soon turned to printing paper money and everything seemed okay initially so the British turned a blind eye. However, within a few decades, Massachusetts got greedy and tanked its currency with massive inflation, leading to a series of crackdowns by Parliament with the Currency Acts.
So, given the history of alternative currencies rising and falling, is there long-term value in Shiba Inu? I don’t see much of a long-term investment here. While the construction of the coin is more sound than Dogecoin, I wonder what the value of these altcoins will be in the long run. You absolutely can make money speculating on SHIB-USD though.
One Youtuber I actually enjoy is Anton Kreil, a former Goldman Sachs trader who had a British reality TV show about a decade ago. One point he makes about risk management is that risk is subjective and not one-dimensional. Someone who wants to trade crypto to pay their rent is likely to have a hard time making rational decisions in the markets, while those who have gone with the flow have made eye-popping gains by doing nothing.
The appeal of speculating on crypto is simple- you don’t need a lot of money to do so, the most you can lose is 100% of your investment, and the most you can make is theoretically unlimited. Under this framework, what do you really have to lose by throwing a few thousand bucks into some speculative investments where the volatility gives you tremendous optionality?
To Anton Kreil’s points on risk being subjective to your personal financial situation, taxation is also subjective, meaning that a single opportunity can be worth more or less to you based on your tax situation. Speculation isn’t a free lunch because the US government has designed the tax code to discourage speculation and encourage long-term investing. The catch here is that if you have gains, you’re generally taxed at effective marginal tax rates from anywhere from 30-60%, when you count state income tax and the myriad phaseouts of credits & deductions, etc. This is asymmetric because if you lose, you can only write off the amount of other gains you have for the year plus $3,000 and have to carry forward the rest. This gets even worse if you make the gains in one year and lose the money the following year, it’s possible to owe a big tax bill for the first year, and have the second year not net against it.
My golden rule for speculation given the tax disincentives in place:
Only risk $3,000 per year plus your YTD capital gains on anything speculative.
If you track your P/L and limit your speculative activities to what you’re able to write off if you lose, you avoid giving Congress a free shot at whatever gains you make without having to give any deductions in return if you lose.
If Robinhood signals that they’re about to allow SHIB-USD on their platform, putting a little money in SHIB-USD while avoiding any negative tax consequences will likely make you a bunch of quick money. I wouldn’t bet the farm on this, but wait and see if anything develops with Robinhood allowing SHIB-USD trading, and that will be your cue to make a play or not.
If Robinhood does allow Shiba Inu trading I would guess it triples in price due to the lack of float to roughly $90 billion in market cap. This is about the same as the peak market cap of Dogecoin during its speculative frenzy. If Robinhood doesn’t allow Shiba Inu to trade on their platform, the coin probably will sink back to obscurity. Ideally, there would be a lag between Robinhood announcing supporting the coin and actually implementing it, giving a nice window to place trades before the feeding frenzy. When it comes to meme-based cryptocurrencies, no one knows anything, but the past few rounds of craziness have shown that if you’re risk-tolerant enough to speculate while being sophisticated enough to avoid tax problems, you generally come out okay in the end.
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