My interview; Behind the Celsius Sales Pitch Was a Crypto Firm Built on Risk; Crypto collapse reverberates widely among black American investors; Wimbledon
1) I did a 14-minute interview on YouTube recently with The Secret Investor Club, in which I discussed how I got into investing, some of the mistakes I made and lessons I learned, and my advice to people just getting into investing. You can watch it here.
2) The more I read about the crypto sector, the more I'm convinced that it's a house of cards that's only partially collapsed... so I continue to recommend avoiding it at all costs.
Celsius was a leading company with credible backers, but went crazy mismanaging risk, which led to its implosion, as this insightful Wall Street Journal article documents: Behind the Celsius Sales Pitch Was a Crypto Firm Built on Risk. Excerpt:
Celsius Network became a cryptocurrency lending giant on a pitch that it was less risky than a bank with better returns for customers.
But investor documents show the lender carried far more risk than a traditional bank.
The lender issued numerous large loans backed by little collateral, according to Celsius investor documents from 2021 reviewed by the Wall Street Journal. The documents show that Celsius had little cushion in the event of a downturn and made investments that would be difficult to quickly unwind if customers raced to withdraw their money. Celsius didn't respond to requests for comment from the Journal.
Celsius had $19 billion of assets and roughly $1 billion of equity as of last summer, before it raised new funds, according to Celsius investor documents from 2021 reviewed by the Journal. The median assets-to-equity ratio for all the North American banks in the S&P 1500 Composite index was about 9:1, or about half that of Celsius, according to data from FactSet.
For banks, that ratio is of great importance: Regulators look at it as an indicator of risk. For unregulated companies like Celsius, the ratio of 19-1 is particularly high given that some of its assets were investments in the extremely volatile crypto sector, said Eric Budish, an economist at the University of Chicago's business school who studies cryptocurrencies. Large banks often have ratios near Celsius', but they hold much more stable assets and have access to central-bank loans for ready cash.
"It's just a risky structure," Mr. Budish said of Celsius. "It strikes me as diversified as the same way that portfolios of mortgages were diversified in 2006," referring to a feature of the 2008 financial crisis. "It was all housing – here it's all crypto."
Here are some additional recent articles about the carnage in the sector:
- Crypto's Tumultuous Second Quarter Leaves Investors Asking: What Else Could Go Wrong?, Wall Street Journal
- Crypto Loves Its Shadow Banks, Matt Levine, Bloomberg
- Thefts, Fraud, and Lawsuits at the World's Biggest NFT Marketplace, New York Times
3) It breaks my heart to see the people who can least afford it sucked into the most speculative "investments" imaginable: Crypto collapse reverberates widely among black American investors. Excerpt:
The widespread losses caused by the cryptocurrency crash are even broader among black investors.
A quarter of black American investors owned cryptocurrencies at the start of the year, compared with only 15% of white investors, according to a survey by Ariel Investments and Charles Schwab. Black Americans were more than twice as likely to purchase cryptocurrency as their first investment...
Jatali Bellanton, the author of a personal-finance curriculum geared towards young black Americans called Kids Who Bank, sees cryptocurrencies as a way to make up for wealth-building opportunities that were historically unavailable in housing and stock markets.
"We do not like to get left behind when it comes to new technology," she said.
The promise of cryptocurrencies as a wealth builder has been supercharged by celebrity endorsements, sponsorships, and advertising.
Prominent black Americans including the musicians Jay-Z and Snoop Dogg, the boxer Floyd Mayweather, the actor Jamie Foxx, and the filmmaker Spike Lee have promoted crypto to their communities.
Lee appeared in commercials for crypto ATM operator Coin Cloud last year, saying that "old money is not going to pick us up; it pushes us down" and "systematically oppresses," whereas digital assets are "positive, inclusive."
Last month, Jay-Z announced a partnership with former Twitter (TWTR) chief executive Jack Dorsey to launch a "Bitcoin Academy" literacy program in the Brooklyn public housing complex where he grew up.
Such celebrity endorsers have faced heavy criticism for getting paid to sell high-risk investments to people who may not have the resources to weather crypto's volatility.
"Ninety-eight percent of these cryptocurrencies were not designed to do anything other than extract money from people's bank accounts," said Najah Roberts, a former financial adviser and the founder of cryptocurrency education center Crypto Blockchain Plug.
"This is not 'get rich quick,''' Roberts added. "There are massive targeting ads that are targeting our community"...
Despite the risk of losses, many black investors are staying invested in the market. Dennis McKinley, 41, has been buying the dip against the advice of his financial adviser. He said his crypto coins now constitute roughly 30% of his overall portfolio, held alongside equities.
"Young black America is just now getting to a point where we have the amount of freedom to have the opportunity to invest in alternative strategies besides just real estate," said McKinley, a small-business owner in Atlanta. "I think that it's important to learn and get out there."
4) I spent the day yesterday at Wimbledon with my college friend Inci. We didn't have tickets for the two main courts, so we watched two doubles matches and then got tickets at the resale kiosk to watch the end of the Cam Norrie-David Goffin match. We and the rest of the crowd were going nuts as the only Brit left in the draw, Norrie, won the fourth and fifth sets to make the semifinals!
It was a fabulous day. The weather was perfect, the strawberries and cream were delicious, the Pimm's was tasty, and I caught up with an old friend I hadn't seen in five years!
Here's a tip for anyone who's ever in London during the tournament: Show up in the middle of the afternoon, buy a grounds pass for five pounds, and then get in line at the kiosk (which resells tickets of people who leave early). After a 60-to-90-minute wait, you can buy inexpensive tickets to one of the show courts (15 pounds for Centre Court and 10 pounds for Court 1) and see a few hours of great tennis.
Here are some pictures and I've posted more on Facebook here:
5) I just flew from London to Bari in southern Italy this afternoon. Tomorrow and Friday, I'll be co-hosting with my friend Ciccio Azzollini our 18th Value Investing Seminar in the beautiful seaside town of Trani. I'll share the best investing ideas and insights I hear in upcoming e-mails.
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.