February 12 2021

The Bull and The Frog

In finance, if you want to punch higher than your weight, you use leverage, whether in the form of margin loans or options. Bearing in mind the fate of La Fontaine’s frog that burst beautifully after a size contest with a bull, retail investors should be wary of over-extending themselves.

The thrill is great, isn’t it? Median monthly household income in the US is $2,000 after rent and food, and if the average person were to have invested all in a perfectly-timed GameStop trade, it would have cleared $20k, or $15k after tax – and even more if leveraged. This is a nice bonus at the end of the year, no doubt. Doing this consistently is harder, and fraught with risks.

The house always wins in the end. First, if you’re paying no fees for your trades, then you are the product. The Robinhood platform now faces painful reckoning on that. Secondly, betting your entire monthly wealth on volatile assets could end you marginally richer with luck, but devastingly miserable if the deal goes pear-shaped. Despite the headlights shed on overnight-billionaires, the crude reality is that fortunes are made in slow and calculated increments. In short, you win big only if you can afford to lose big.

Spotting the early trends away from the incumbent players always pays off. Risks are higher but stakes are smaller. Crypto is the case in point, with a fast-paced environment and promises of glitzy tomorrows. This reminds the gold rush of the mid-19th century, where pan sellers were actually on the surest path to money-making recognition.

There again in crypto, a lot of the new initiatives in Decentralized Finance (DeFi) are based on ETH-coded smart contracts, and transactions costs (gas fees) have gone through the roof lately. For one thing, Vitalik Buterin’s ETH is supposed to morph into ETH2 to better respond to higher volumes, but there remains that fees are the only certain thing in DeFi markets right now.

So, if you are the proverbial frog, please make sure you have a bull friend. At least you could jump on his shoulders to check if it’s worth seeing the world differently.

360 Advisory – Markets