Coinbase is a hot mess (plus MongoDB, Bank of Nova Scotia, MCB, and others)

The r/Coinbase subreddit has been flooded with customers complaining about Coinbase:

  1. Taking money out of their bank accounts via debit (see comments here).  Adding insult to injury, users are furious at overdraft fees charged by their bank and not being able to pay rent.
  2. Not crediting funds deposited via wire transfer (example)
  3. Not being able to transfer assets out of Coinbase (search this thread for “wallet” or “withdrawal”; or see Twitter)

The problem I see is that draining bank accounts is not a viable business model.  Those transactions will be reversed.  Eventually, Coinbase will be cut off from accepting credit cards and debit cards because nobody will want to pay for the customer service and fraud investigation costs that erroneous transactions generate.  It is clearly unsustainable.  To be fair, this might simply be a case of buggy software causing the erroneous transactions.  Anti-fraud practices and growing pains might explain some of Coinbase’s other issues.  However, the inappropriate transactions don’t look like the work of shoddy IT.  So here’s my crazy theory: one of the world’s most popular and reputable exchanges is borrowing money from consumers (without their permission) to stave off a liquidity crisis.  I can’t definitively prove this so you’re going to have to look at the evidence and make up your own mind.

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Blockchain is a useless technology

Blockchain, a way of implementing a distributed ledger (distributed record-keeping), is a novel technology with little real-world practicality.  The original Bitcoin white paper published back in October 31, 2008 spurred little interest in distributed ledgers.  The distributed ledger was ignored for years until Bitcoin started receiving mainstream attention and a few years had passed.

I simply couldn’t find much evidence that distributed ledgers are useful for any real-world applications (other than speculative asset bubbles).  Once you understand that blockchains are bad at solving real-world problems, then you will understand why Bitcoin will fail.  The blockchain imposes limitations that makes Bitcoin a bad version of something that has been tried in the past: e-gold (description here and Wired profile here).

A company’s stance on blockchain can also serve as a test of a company’s management.  In my view, companies pushing blockchain technology (e.g. IBM, Microsoft, Intel, Oracle) are disconnected from customers’ actual needs and have mediocre management.  Companies that don’t talk about blockchain (e.g. Facebook, Amazon, Google, Apple) are more likely to produce sensible technology that will work in the real world.

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Betting against the cryptocurrency bubble via AMD

The cryptocurrency craze has infected the real world economy, driving up the prices of GPUs (graphics chips used for playing 3-D computer games that are also really good at crypto calculations).  Mining Ethereum with GPUs has become an increasingly profitable endeavour largely because the price of Ethereum went up about 170 times from $8.24 at the beginning of 2017 to a peak of around $1400.  Mid and high-end GPUs are selling out everywhere, retailing for 2 to 3 times their suggested retail price.  PC Part Picker has some good data on market pricing of GPUs such as the Radeon RX 570.

Note that computer hardware normally depreciates over time, roughly halving in price every 1.5 to 2 years due to Moore’s Law.  Instead of depreciating, most GPUs have appreciated wildly thanks to rising Ethereum prices.

If the crypto mining market collapses (due to a broad collapse in cryptocurrency prices), I am willing to speculate that AMD’s valuation would better reflects its difficulties in generating profits.  Historically AMD has never been a particularly profitable company, losing $7.82B of the $8.34B in capital raised.  In YE2017 AMD earned $62M before taxes, buoyed by aggressive accounting (perhaps $40M-97M+?) and unusually high GPU demand (perhaps a few hundred million?).  If AMD returns to its money-losing ways, its shares ought to trade closer to its $0.611B book value (plus the value of its x86 license) rather than its current $10.83B market cap.

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US health insurers

US health insurance stocks have performed extremely well.  Even if you had bought the worst ones, performance would have been similar to the S&P 500.  Why?

While the overall US healthcare system is dysfunctional relative to those in other developed countries, a broken healthcare system doesn’t explain why insurance stocks have done better than hospital stocks.  While hospitals engage in abusive practices such as surprise out-of-network medical bills (balance billing), hospital stocks have been mediocre investments.  A better supported explanation is scale.  One manifestation of scale is in dialysis treatment, a unique market where Medicare is the biggest negotiator with at least 90% of patients.  Commercial payers, with their lack of scale in this situation, are charged many times what Medicare pays.  SIRF’s analysis puts it at roughly $1,050 per treatment versus $250.  Of course, no health insurer enjoys 90%+ market share so their scale advantages are smaller.

Here’s a look at how market cap (a proxy for size) correlates with return on assets:

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Some ways to short Bitcoin

The price of Bitcoin has fallen significantly from its peak… perhaps foreshadowing a quick collapse.  Perhaps short positions in Bitcoin will work out quickly.  But who knows… short positions may turn out to be extremely dangerous as Bitcoin may skyrocket even more.  Here are some quick notes…

For the image above, the columns are:

  1. Ticker
  2. Green = shortable, dark green = no borrow, red = Interactive Brokers won’t let you short it.
  3. Borrow rate (retail rates).

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