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Posts from the ‘Overstock.com (OSTK)’ Category

A few more thoughts on Overstock

My biggest position right now is Overstock.  I’ve already written two posts about the stock (here and here). I actually added to the position some more today as it dipped back into the $40s.  I’ve been spending most of my time on the name.  Here are a few new thoughts on it.

What is the lending platform worth?

I am constantly re-evaluating the lending platform.  The industry is really opaque and its been a lot of work getting numbers that I have some comfort in.

I have found two sources that seem credible.  The first is this paper from Beneish, Lee and Nichols.  The second is this lawsuit from the pension funds against the prime brokers.

In what follows I am considering the US stock market only.  I believe that once this market is proved out, tZero should be able to expand the platform to other market.  But we’ll leave that for the future.  Right now the big question is whether tZero can make this work in the US.  The news on the call that there is indeed $100 billion of inventory and that they had been offered another $6 billion of hard to borrow that very day (as I’ll describe, the vast majority of revenue from stock lending comes from a few hard to borrow securities), is reassuring.

The US lending market generates $4-$4.5 billion of revenue to prime brokers.  According to the lawsuit documentation, and also described by Bryne a number of times, the prime broker cut is supposed to be around 60%.  But most assume the actual cut is higher because of inter-broker transactions that reduce the cut for the lender.  So let’s say its actually 75%.  That pegs industry revenue from US equities, including what is going to the lender, at $6 billion.

You can get to a very similar number by using the data from the Beneish paper and this article from the securities lending times, which was referenced in the lawsuit document.  The Beneish paper uses IHS Markit data on stock lending rates and volumes.  Global equities on loan are $851 billion and the US makes up 55% of the lending market.  Therefore total US equities on loan are $472 billion.  The average borrowing rate for US equities on loan is about 1.5% (its actually a bit higher but roughly).  So that gives a market size of $7 billion.  So its in the ballpark of the first number.

You often hear a much smaller average borrowing rate quoted, something around 45-50 basis points.  I believe this is because the number quoted is referring to the volume averaged borrowing rate.  In fact the number is usually is described as just that: a volume weighted average.  The reality of the stock lending business is that 80% of equities are easy to borrow and fetch a very small rate (33 basis points).  So most of the volume generates very little revenue.  The majority of revenue comes from a few hard to borrow stocks.  To give perspective, and its a rough calculation because all the data isn’t there, but I calculated that around 50% of revenue from stock lending comes from the 5% most hard to borrow stocks when I used the tables and data from the Beneish paper.

So I’m going to assume it’s a $6 billion market.  Byrne has said that they want to cut fees by 50%.  He has also said the tZero/lender split will be 20/80.  That gives a total addressable market of $600 million for tZero.  I expect that to be very high margin revenue, though Overstock hasn’t given us any numbers to put to margins yet.

One consideration that I haven’t accounted for is the impact of collateral on the prime brokers numbers.  I’m still fuzzy on how this will work.  I believe that the prime broker revenues quoted are fee only revenue.  However the prime brokers also makes some money from holding collateral of the borrower.  Some of this collateral return is passed back to the borrower as a rebate, but the rest is profit to the prime broker.  I don’t know how the collateral will be considered with tZero, but if the lenders are now going to participate directly in the interest generated, that may be included in that 20/80 split, which would make my above estimates low.

Even ignoring the collateral, the opportunity is considerable.  At 10-20% market share, which should be a reasonable objective if the platform is successful, tZero stands to generate $60-$120 million of high margin revenue.  An 8x revenue multiple on $120 million puts you at $1 billion valuation.

Of course there are plenty of folks that don’t think tZero will succeed in capturing any of the market.  I guess that’s what the next few months will prove out.  For what its worth they’ve gone from $0 to $100 billion in two months.  And they’ve brought on board Quantum Fund and Passport, who presumably aren’t making their investments in Overstock because of their desire to make a play in e-commerce.  But we’ll see.

What is e-commerce worth?

The second element I’ve spent time on is e-commerce.  To be honest, for the longest time I was scratching my head about the e-commerce numbers I was hearing.  Marc Cohodes estimated in his Grants presentation that the business could fetch $70+ in a sale.  D.A Davidson valued e-commerce at $58.

When I was stepping through the valuation, I had trouble coming up with those numbers.

Starting with the existing business, I calculated that EBITDA from e-commerce (after eliminating the losses from Medici) for 2015, 2016 and 2017 were $33 million, $31 million and around $18 million for this year.

Byrne said on the third quarter call that there would be “hundreds of basis points of synergies” if they got together with a “bricks” retailer.  I assumed 200 basis points.  Presumably there would also be sales growth from the membership base of the “bricks” acquirer being directed to Overstock to shop.  I assumed 20%.

With all these assumptions the best I could come up with was about $80 million of EBITDA including all the synergies.  That made it hard to justify where the big buy-out numbers were coming from ($70 per share is about $1.75 billion before considering the Soros and Passport dilution, or more than 20x EBITDA including all the synergies).

But then I found something I missed the first time on the conference call.  @teamonfuego, who has been working on Overstock valuations as well, pointed to this passage late in the call.  My underline:

Yes, so this synergy goes both ways. So for example, if we were combined with a large chain, these large chains have similar logistical footprint. They typically have a dozen or so mega distribution centers, each of which are feeding a couple dozen distribution centers, each of which are feeding 10 to 15 stores. If we were integrated with such a company, we could overnight I mean, you would have a system that was competitive with Amazon, fulfillment by Amazon or even nicer than fulfillment by Amazon in several ways. We built, this thing, Saum and Stormy, actually, built some years ago, SOFS. This thing we called SOFS is a software logistics system for an agile network supply chain. We’ve only had it hooked up to our 3 distribution centers, but it could be hooked up to thousands, and it was actually built to be hooked up to as many as we wanted, you don’t need thousand, you need a dozen. So just by, for example, if we were part of a large brick-and-mortar chain, that itself was like $200 million, $250 million of various logistics cost, all right to the bottom line.

I’ve actually talked to a couple of people now that acknowledge that e-commerce logistics are a problem for many of the bricks retailers, and a solution to that problem could be quite coveted.

So who has thousands of distribution centers?  Well this article from Forbes is interesting.  So I’m not at all saying that Walmart is a potential acquirer, but more generally the article talks about how Walmart specifically but also other bricks retailers are embracing what is called omni-channel commerce.  Omni-channel commerce is essentially the process of turning each store into a distribution center.   A number of the chains mentioned, along with plenty of others, would have the 1000’s of stores that would make the logistic cost reduction realized.  The concept aligns pretty well with what Byrne is talking about above.  Needless to say this can change the e-commerce valuation substantially.

Curious Transaction

One of the first things that caught my eye the day of the third quarter earnings release was this disclosure in one of the 8-K’s.

I found it very curious.  Why would Overstock terminate an existing loan and lease agreement in order to make a similar loan with Patrick Byrne’s family?

Indeed I was not surprised when I saw that this transaction was picked up by a few of the shorts on twitter a couple days later.  They pointed to it as an example of a questionable related party transaction.  I can’t disagree, it’s certainly odd. But I wonder if it’s missing the point.

I dug into exactly what the master lease agreement was for.  As it turns out, Overstock entered into the MLA on November 25th 2015.  The lease is to “finance certain software and/or software licenses(s) (“Licensed Software”), software components, including but not limited to, software maintenance and/or support“.

The lease and debt agreement occurred close to the time of the closing of the acquisition of SpeedRoute.  The purchase was initiated in August 2015 and it closed some time before the beginning of 2016.  In fact the day before, on November 24th, Overstock issued an S-3 amendment for potential selling stockholders from SpeedRoute of Overstock stock.

The timing makes me think there’s a pretty good chance these are Speedroute’s assets that Overstock is doing the MLA for.  Reading through the MLA, those assets were secured by Overstock’s land and building.  So you had tZero software secured by Overstock.com assets.

I have to wonder if Overstock cancelled the loan and MLA in order to disentangle the two entities.  Byrne decided to take on the loan and MLA himself (via his family) as a short term plug.  Keep in mind there was no reason to end the relationship with US Bank.  The agreement extended to 2020.  Also, the terms of the loan to Byrne’s family was at a higher interest rate, so this couldn’t be construed as an economic .  Obviously the optics of leasing out from your own family are unfavorable, and I can’t see doing that unless you had another motive.

I may be totally off base about this, but I just have to think you don’t make this change unless you are pretty far down the road to some sort of separation.

Bitt

While all the focus is (rightly) on tZero, Byrne did point to Bitt as his second most promising investment.  I knew Medici owned 11% of Bitt but didn’t know they could own up to 35% with warrants.

Bitt is in the business of digitizing currency to the blockchain for governments.  they are “creating digital wallets for citizens, for people, essentially frictionless payment system, including remittances, which incidentally are a $500 billion industry globally, remittances alone, on which the vig is about 15%.”

Bitt is close to completing their first use case in Barbados.  Catlin Long (from Symbiont) commented on this on her blog back in 2016:

More central banks in small countries will follow the lead of the central bank of Barbados, which green-lighted a blockchain start-up called Bitt to create a digital Barbados dollar that uses Bitcoin’s blockchain as an alternative method for settling foreign exchange. Small central banks are searching for alternatives because local banks are losing access to US financial system, owing to the retreat of American correspondent banks from small countries — a trend called “de-risking.” This is choking off trade, which is the lifeblood of most small economies.  Folks, this an unintended consequence of laws requiring U.S. banks to comply with strict anti-money laundering and know-your-customer regulations. These laws are hurting the developing world — and, ironically, boosting Bitcoin as a valuable alternative payment system. Kudos to Barbados for its creative solution!

Byrne said on the call that Bitt’s development in Barbados is undergoing 4 weeks of testing.  So its pretty close to coming to fruition.

I mean, this thing has a global application, and what I think the first to market with the kind of wallet we’re bringing to market, I just saw, I mean, it’s all in testing. It’s all done. It’s all being tested for another 4 weeks, it’s really slick. It’s really better than anything I’ve seen in the market, that’s a potential enormous business.

While I don’t really have a sense of what the addressable market is for a digital currency, I suspect if the blockchain really does snowball and become the preferred method of recording transactions, it would be pretty big.  If Bitt can be first to market with a successful launch in Barbados, I think that the company is probably worth quite a bit (pun intended).

A few other random thoughts

1. On the conference call Byrne said that “the market” wanted Overstock to get their ownership in tZero down to below 50%.  I think that makes sense for optics.  It makes me wonder if we get some sort of divestiture announcement before the ICO.  Maybe selling a 20% stake to a strategic investor, which along with the ICO would take the overall stake down to 50%?  Purely speculating here but it would seem to make sense to do that before the ICO.  I didn’t really understand the whole “bitcoin fork” reason for the 15 day delay.

2. The securities purchase agreement for the Quantum Fund is lacking the normal disclosure that no non-public information has been exchanged (h/t 20slots for this).  Note that in the Passport agreement, the statement is present (any information that constitutes or could reasonably be expected to constitute material non-public information…)

3. Who was the man in the next room?

4. There was some insider selling over the last few days.  At a glance it appears like they were selling out, but after closer inspection its clear that each of these insiders own significant amounts of restricted stock.  For example Sam Noursalehi, President of Retail, sold 5,000 shares.  He owns 48,000 shares of restricted stock in addition to the remaining 11,000 shares he owned.  I’m not too worked up about these sales.

5. The shorts have been out in full force on Overstock.  Lots of tweets and articles.  I’m actually somewhat comforted that so far, while I can see that the shorts are digging through IP addresses, looking for backdoors to tZero platforms and searching through the Linkedin connections, I haven’t really seen anything that scares me that much.  Of course that could change tomorrow. I’m sure there will be another article.

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My thoughts on the Overstock/tZero ICO

This is a follow-up on my original post on Overstock and blockchain.  There are likely be more to come as I learn more (and come up with more questions).

Up until I got interested in Overstock.com I had not given a lot of thought to initial coin offerings (ICOs).  I knew they were a way of raising money, I knew a few fellow investors were making a killing on them, I knew that the details were often murky and that the holders rights were not all that clear.  But I didn’t really delve into the concept too much.

As I explained in my last post, I have yet to make a serious investment in crypto-currencies.  I was running into stumbling blocks being Canadian, and it appeared that there were going to be more stumbling blocks with ICOs.  So I didn’t look too closely.

But when I started looking at Overstock, I started thinking about ICOs.   Overstock’s subsidiary tZero is going to start the pre-sale of their ICO on November 15th (there is a countdown on their website).  tZero is 83% owned by Overstock.  This is, in essence, the first ICO for a publicly traded company.

After spending some time on it, what I’m kinda thinking now is that an ICO is a pretty neat way for a public company to raise money.  Particularly if it’s a company trying to fund a new venture that needs scale from the customer to succeed.

What are the details?

From what I can tell, we don’t know all the details.

Overstock announced some details about the upcoming t0 ICO on October 24th, so about a week ago.  As I pointed out in my last post, of these details I thought the key ones were the following:

  • The tZERO token will be tradable on tZERO’s U.S.-regulated ATS.
  • The tZERO token will incorporate profit-sharing features of a security as well as utility features of an app token, including:
    • Token holders will be able to use the tZERO token to pay for fees on the ATS and payment of such fees using tZERO tokens will grant up to a 25% discount as compared to payments made using U.S. dollars. The tZERO token is expected to have additional functionality and token holder benefits to be announced at a later to date and will be included in the offering memorandum; and
    • tZERO believes its token will be the first to offer a percentage of tZERO’s profits, distributed as a quarterly distribution paid into tZERO token holders’ digital wallets.

The benefits of token holding are: A. discounts when using the platform, B. quarterly distributions and C. additional functionality to be announced at a later date.

The one thing that I’m not clear on is whether the discount is referring to the token exchange, the share lending exchange or both?  I am assuming its referring to both, but that might be wrong.

The most important distinction is that this ICO does not convey ownership, at least not in any traditional liquidation/acquisition sort of sense.  While the strict definition of Simple Agreement for Future Token (SAFT) considers this offering a “security token”, and that is how Overstock refers to it in their press release, it is not a security in the way we usually think of it.  Byrnes himself has referred to the token as a “utility token” on other occasions.

When the ICO is complete Overstock expects tZero will get somewhere between $200 – $500 million of capital (based on comments made by Byrnes a couple of weeks ago).  This will be used to further develop their various platforms: their security lending platform, their token exchange, potentially other exchanges that have yet to be revealed.

What I think is pretty cool

The way the token is set up has some pretty interesting consequences.  Unlike a share offering or debt offering, the capital provider doesn’t just give his money and sit passively. The token holder has an active interest in seeing the platform succeed.

This is because one of the two key features of the token is a discount on usage.  This means the value of the token is best realized by a consumer of the platform.  Maybe a speculator can make some money buying a token and watching it appreciate but the token holder who is also lending stock or buying tokens on the exchanges (so using the platform) is going to be benefiting more from holding the token then the speculator.  Moreover, once a consumer of the platform is a token holder, they have an interest in making that platform succeed because the value of their token will increase based on its success.

In this scenario the consumer of the platform is the natural lender.  I think that’s the key point here.

The lynch pin to the whole process is having a platform that is valuable.  If you have that, then the token offering becomes a virtuous circle of on-boarding consumers and giving them a stake in its success, which in turn will help lead to its success.

In the case of tZero, if a pension fund decides they like the idea of the alternative security lending exchange, they can buy tokens.  This will give them a discount on transactions when using that exchange.  Furthermore, once they have tokens they can benefit from the dividend and benefit from the rise in value of their token.  So it becomes in their best interests to drive business to the exchange and get others involved.

The same reasoning can be used for the other tZero platform, with a consumer of the ICO trading platform.

As for the benefits to Overstock, I’ve already pointed out that tZero gets a capital injection they can use to facilitate the growth of the business.  If allocated properly, this presumably will lead to more value creation for the token. And I imagine, though I don’t know this for sure, haven’t seen it detailed, that Overstock will keep a significant percentage of the tokens so they participate in the increase in value of the token as the platform grows.  The less obvious benefit, but the one that I think is the most interesting and should be underestimated: in many ways Overstock acquires partners in the business with an interest in seeing it succeed but without giving away ownership.

What they are really giving up is a portion of future revenues determined by the discount on usage. But again, this benefit only accrues to consumers of the platform.  And Overstock/tZero needs those consumers to buy into the platform anyways for it to be successful.  Giving away a portion of that future value to prospective consumers in return for improving the chances that this future value is realized seems like a pretty reasonable trade-off to me.

The other way to think I was thinking about these benefits was to try to frame it as a very unique debt offering with unusual attributes.  First, the principle will never have to be repaid.  Instead of payment of principle you give payment of discount.  Second, the “interest” that is paid (I’m framing the dividend as being an interest of a sort) is a function of the platform success (in terms of lost revenue from the discounts and from dividends paid).  And third, you give some sort of stake in future developments yet to come.

I’ll be honest. I have thought about this in maybe half a dozen different ways in the last few days.  Its kinda like debt, kinda like equity, kinda like a membership, kinda like a co-operative, but not really exactly like any of those things.  None of the analogies fit perfectly.  This is different.  And It’s a pretty cool way to raise money.

One other thing…

The last thing I wanted to mention is that @teamonfuego found a great bit of due diligence.  A little over a week ago Byrnes made three announcements at the Money 20/20 conference.  One of these announcements was with respect to the digital locate receipt technology they are using in the tZero stock lending platform.

Brynes said that the platform is now live in an alpha stage and has about $8 billion of inventory.  If you remember from my last post, there was about $100 million of inventory as of the second quarter earnings call.

But even more impressive, Byrnes said that by November 1st the platform will go live with more than $120 billion of inventory.

He also said they were integrating with a couple platforms (so far unnamed), have about 8,000 users, active traders involved, and he reiterated that he thinks they can disrupt the prime broker desk which is 75% of revenue of prime brokerage industry.

When I wrote my original post on Overstock, my thought was I would add once we have confirmation of buy-in on the security lending platform.   I doubled and then tripled up on my position on hearing this news.

My bets on Blockchain

This is going to be a quick and dirty “here are my thoughts” post because I want to get the idea out there and solicit feedback.  I want to talk about what I have done with blockchain, where I think it might be going, and why I am (cautiously) optimistic that blockchain technology isn’t the bubble that many fear.

Back in May I decided that bitcoin just might be the real deal. I started to look for ways of investing in it.  It was a tough go.

I found that putting money into bitcoin in Canada was somewhat more difficult than the United States.  I cringed at the idea of providing a bunch of personal information to some exchange site, including drivers license and a credit card. I’m a dinosaur in some respects and I get nervous about transferring personal information over the internet.

I also found very few ways of playing the trend via the stock market.  There were basically zero publicly traded company’s that I could find.

I ended up taking only a small position in bitcoin and ethereum (really small).  But I also did another, much smarter thing.  I took a tiny position in Overstock.com.

The size of the position was inconsequential.  I’m not going to pretend I got in before the move or even that I understood what Overstock was doing.  I did it simply so I would have a placeholder in my portfolio and I would be aware of it if something happened.

In mid-September something happened and the stock started to go.

Now fortunately but unfortunately, I was really caught up in the Helios and Matheson story at the time, and so I didn’t pay a lot of attention to Overstock.  My mind doesn’t multitask all that well, and delving into blockchain while I was trying to decipher Moviepass just wasn’t within my capacities.  Its too bad, because if I had I am sure I would have seen what I see now and gotten in about $10-$15 earlier.

Nevertheless, I did get around to looking at both Overstock.com and at other crypto ideas over the last couple of weeks.

A few things have struck me.

Blockchain not Currencies

First, I feel like the real play here is with blockchain, not bitcoin. Getting into crypto-currencies has been a money maker, no question.  But going forward I am of the mind that the winners are going to be companies that have figured out ways to use blockchain technology to eliminate inefficiencies, in particular those associated with the middle man of particular transaction classes.

The most common description I hear of blockchain is that it is a decentralized platform.  That has never really resonated with me.  Maybe the word decentralized is too vague.  After doing much reading and listening on the subject, I have found that the definition that makes more sense to me is to say that blockchain is simply a very effective way of eliminating the middle man.

I know if I was to use that definition publicly I would get a lot of push back: its too narrow, it doesn’t describe all the functionality or possibilities that blockchain can encompass, etc.  But to me, looking for near-term disrupting investment ideas, that is the definition that sticks.

Our world is full of transactions that individuals and companies perform with each other every day.  Each transaction requires a level of trust between the buyer and seller.  In many cases the level of trust required to complete a transaction directly between buyer and seller is not possible.  Maybe its distance, logistics, complexity, could be any number of things.   Whenever we run into this “trust gap” the solution has always been to employ an intermediary that embodies a greater level of trust and through which the transaction can flow.

Of course this middle man takes a cut.  In some cases, especially if its an opaque market, they take a big cut.

The way I look at blockchain is it’s a way of dis-embodying that trust into technology.  The middle man disappears.  The skim shrinks.  Everyone (other then the middle man) benefits.

This makes so much sense to me.  It seems inevitable. It makes me want to go all in.

Overstock

Overstock is the obvious way to play this.  I finally got into Overstock in a more meaningful way in the mid-$30s.  I have added since then.  The stock is parabolic which is frightening and I can just as easily see it going to $35 as $55 in the short run.  I mean who knows when a chart looks like this and is clearly being run around by traders.

In the longer run, I think that what Overstock is doing is fascinating and if it works, the stock will go much higher.

The thing that really jump-started Overstock was their initiative, via their subsidiary tZero, to launch a trading systems for tokens.  That seems to have coincided with when the stock took off.  They also announced their own initial coin offering (ICO) for tZero, which will take place over the next couple of months.

I think these are both great initiatives and are movements in the right direction.   But the most interesting development to me is the blockchain securities lending platform that Overstock’s tZero subsidiary has developed.  Byrnes does a really good job of describing how the platform works on the second quarter conference call.  Start listening at a little after the 20 minute mark.

In this case, the middle man that Overstock is trying to eliminate is the prime broker.  The cut that the prime broker appears to be taking in security lending seems to be abnormally large.  If you want the details of how it works, just listen to the call and do a few google searches.  Its clear that A. this is a very large market and B. there is a lot of waste to be eliminated if the middle man can be removed.

What I also find so interesting about the opportunity, other than that it makes sense, is that even by taking a much smaller piece of the pie than prime brokers currently do Overstock/tZero can make a lot of money because the transaction base is so large.  IHS Markit says that security lending is a $9 billion market.  If this platform can begin by taking even a smidgeon of that, its going to be very significant to the stock.  If the platform goes viral, well then things would get silly.

On the second quarter call Byrnes noted the following about the platform (my underline):

I’ll mention we have about 700 symbols in inventory now. 100 of them are hard to borrow, we have over $100 million in inventory. Another reason I’m in New York is talking to people who have billions or tens of billions of dollars that they want to integrate, they want to provide as inventory. So, we’ll see how this goes, but I’m really quite proud of this system.

So its just starting to scale.  I think it was only 5 weeks old at the time.

I admit I am fuzzy about the economics.  Clearly the play here is to make this advantageous to funds and short sellers by lowering transaction fees and taking a smaller skim than what prime brokers take, and by performing the task with complete transparency.  Byrnes goes on in the call to define the following economics of the platform net to tZero:

This is the best use of blockchain I’ve ever seen, because it addresses exactly the issues that regulators have, that short sellers have, that prime brokers have. I don’t want to be sued if this turns out to be wrong, I think the capacity is 1% of x, if we theoretically got somebody putting in $1 billion, I think we should be generating $10 million through, essentially the bottom line of tZERO, and I think there may be possibilities well beyond that.

None of this is to say that it’s a sure thing that the security lending platform, the ICO platform or any of the other initiatives that Medici (the Overstock subsidiary that owns tZero) has a stake in, are going to pan out.  But I am of the mind that some of them will.

One last thing about Overstock that I think is worth mentioning.  The ICO seems like a really interesting way to raise money to me.  According to the press release that I linked to above, the ICO will give participants a tZero token that has the following attributes:

  • The tZERO token will be tradable on tZERO’s U.S.-regulated ATS.
  • The tZERO token will incorporate profit-sharing features of a security as well as utility features of an app token, including:
    • Token holders will be able to use the tZERO token to pay for fees on the ATS and payment of such fees using tZERO tokens will grant up to a 25% discount as compared to payments made using U.S. dollars. The tZERO token is expected to have additional functionality and token holder benefits to be announced at a later to date and will be included in the offering memorandum; and
    • tZERO believes its token will be the first to offer a percentage of tZERO’s profits, distributed as a quarterly distribution paid into tZERO token holders’ digital wallets.

My take on this (tell me if you think I am wrong) is that the value intrinsic to the token is not based on ownership.  The beauty of it is that its not really an ownership stake.  In fact I am pretty sure you can’t do a US based ICO right now that generates out right ownership in a company (the SEC hasn’t laid down any structure for this yet but again tell me if I am wrong about this).

Instead the token is more like the right to participate in the success of the platform.  I almost want to say that its like an Amazon Prime membership for blockchain technologies but maybe that’s too cheeky and a bit of a stretch.   Nevertheless, the value of the token is a function of the success of the platforms created by tZero, realized via the discounts and dividends that are derived from their success.  So the benefits are most easily realized by participants in the platforms, in this case those who participate in the ICO exchange and the securities lending exchange (maybe others?).

To use a word I hate to use, it all seems very synergistic.

Think about it.  These tokens, while not offering ownership in tZero, are going to give holders a significant discount on transactions on the platforms and are going to give a dividend based on the success of the platforms.  So the bigger the tZero platforms get, the more valuable the tokens are.  And if you are a fund that is thinking about how it would be nice to lend securities without having to have a prime broker take a big chunk of the interest, it probably makes sense to take on some token exposure so you can make your transactions even more cheaply and even get a dividend kick-back that is a function of your own volume to some degree.

Its easy to see how if this works, it could snowball.

Other ideas

Overstock is my favorite blockchain idea hands down and the only one I have a truly meaningful position in.  But I also took small positions in a few others.

I own two Canadian venture stocks, LeoNovus and Posera, which both made JV’s with the company DLT labs.  I will be the first to admit that the details on what comes of the JV’s are murky but I did some work into DLT Labs and they seemed like a legitimate blockchain development company so I figured each was worth a small stab.  LeoNovus also has a proof of concept agreement with a Canadian bank and was interviewed on Capital Ideas TV here.  Both of these stocks are actually up quite significantly today, and I’ll admit that I have questioned whether their growing market capitalizations are justified on multiple occasions today.

I also took small positions in a couple of Chinese related ideas, Xunlei Limited and Xinyuan Real Estate.

Xinjuan has somewhat of a peripheral blockchain idea.  My original impetus to buy the stock was that it appeared cheap compare to other Chinese real estate developers and we seem to be in a bit of a China bull market at the moment.  But its also had a blockchain platform for property financing live for over a year now and that gave me some added reason to take a small spec.  I came across the stock from this youtube video.

Xunlei has a blockchain based product called OneCloud and has recently had an ICO, which is not easy to do for a Chinese company.  The company also has over $5 in cash and investments per ADS, so it appears relatively cheap and thus I figured it was worth a tiny punt.

Again none of these four stocks are significant in size for me. Way less than 1%.  Overstock is the only one I have any real conviction in so far.

Conclusions

I am not going to pretend I have some amazing insights that project the success of any of these companies.  I’ll be clear about this, and I include Overstock in the statement.  This is to a large degree a speculation.  The technology makes sense to me, and in the case of Overstock the applications they have identified make sense to me, but I don’t really know if it pans out in the end.

It is a bit like Helios and Matheson in the sense that while I don’t know how it all plays out, my thinking is this:  I suspect that for foreseeable future the money wanting into blockchain technology assets is going to far exceed the number of available avenues to invest in.  This happens all the time and when it does it floats a bunch of little companies along with it.  A few of these companies turn out to be winners.  Many turn out to be flops.  But getting from here to there can make you a lot of money if you are agile.  So for the time being, picking the eventual winners kind of takes a back seat.  That’s why I was willing to take some bets on the smaller basket outside of Overstock.

And like I said, I don’t even know if Overstock will be a winner here.  Maybe no one will adopt their initiatives and tZero will crash and burn.  I’m certainly no expert in the field.  What I do know is that while Byrnes seems to be more than mildly hated by many, which I think is great, when I listen to what he has to say (for example as the 2014 key note at this Bitcoin conference) I think he makes a lot of sense.  He clearly has thought this through and made his bet after much consideration for underlying conditions.  I am of the mind that the underlying conditions he describes are accurate, and that the direction he projects is correct.

So I’m going along for the ride.  And I will tell you what I want to do.  I want to take a really big position in Overstock.  I think the upside is so big if these ideas pan out.

But its really hard to jump heavily into a stock up as much as Overstock is. My position size right now is a relatively modest, but not insignificant, 3.5%.

I am in part writing this post as a request for comment.  Please send me emails with opinions of whether you think this makes as much sense to you as it does to me.  Or not.  And whether you think Overstocks initiatives or any of the other company’s I’ve taken a spec position in, will pan out or not.

Its so new and uncertain, but also seems to make sense.  So I am open minded.

Week 177: Perspective

Five weeks ago I wrote that I was walking away for a while.  And so I did that.  It didn’t last as long as I had anticipated.

At the time I had taken my portfolio to about 60% cash and I had a number of shorts that helped hedge out the exposure from my remaining longs.  In early October I had basically stepped away because I had made some mistakes and lost confidence in my decisions.  It had started with the mistake of not looking closely at the oil supply/demand dynamic, which was compounded by the mistake of selling the wrong stuff when the bet began to go wrong.  As I lost money on a few oil and gas holdings, rather than reducing those positions I reduced other positions, presumably with the intent of reducing my overall risk.  Unfortunately this isn’t really what I was doing.  What I was actually doing was selling what was working while holding onto what wasn’t.  A cardinal mistake.

The consequence was that I saw my portfolio dip 12% from its peak by the second week in October.  More frustrating was that as stocks recovered in late October, I watched as some of the names I had sold near their bottom, in particular Air Canada, Aercap, and Overstock, recover their losses and were on their way back up.

I wrote my last post on a Friday afternoon after the market had closed.  Over that weekend I was virtually unencumbered by the markets.  My portfolio was cash, my blog was on hiatus, I had nothing to prevent me from thinking clearly. I don’t remember exactly when the moment came, but at some point that weekend I had a realization.

For those who have followed this blog over the past few years, you will remember that in December of last year I made a very large bet on New Residential.  The stock had gotten hit down to below $6 at the time.  I thought this was rather ridiculous and so I bought the stock.  I bought a lot of the stock.  I made it a 25% position in my portfolio.

In a narrow sense, the trade worked out.  By the end of December the stock had jumped close to $7 and I sold the position for a tidy profit.  But in the broader sense, it was an abject failure. Read more