Home Initial Coin Offering Bitcoin and ICOs Steal Stock Market Volatility

Bitcoin and ICOs Steal Stock Market Volatility

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This post originally appeared in Money Stuff.

Here is an absolutely baffling story about “the Global Sports Financial Exchange (GSFE),” where you can “buy” “shares” in sports teams and “get paid dividends on every win”:

“You decide, like the New York Stock Exchange does, what you’re willing to pay for that share and what you’re willing to sell it for,” said Ward, the Global Sports Financial Exchange’s CEO. “It pays dividends at every single quarter, so you can make very good money at it.”

The GSFE is based on the “exact same structure that was used when the New York Stock Exchange first opened in 1817,” the 48-year-old Ward told “Squawk Box”.

After each game, the winning team’s shareholders get a dividend, and the losing team’s share price likely goes down. Team stock prices fluctuate based on a range of criteria such as performance, draft picks, and trades.

Where do … the dividends … come from? (Also: “The exchange is offering each league half of each transaction made in their sport.”) I am missing something essential here. You take money from gambler-investors, you give half of it away to sports leagues for some reason, you keep some of it as profit, and you pay out the rest in dividends? So the gambler-investors get back less than half of the money they put in? Why is that an attractive proposition for them? Delightfully, the exchange “is operated by a 501(c)(3) educational Non-Profit with the mission to end sports gambling and bring financial literacy to the masses via sports trading instruments.” To end sports gambling! By renaming it!

A reader once proposed to me that the reason that stock market volatility is so low is that all of the volatility has moved to bitcoin. I think there might be something to this. Stock prices have historically been too volatile, moving more in reaction to news than is justified by its effect on future cash flows. One crude interpretation of this fact might be that people like to gamble, and the stock market has historically been a fun gambling venue, and so uninformed but enthusiastic traders would enjoy speculating wildly on the latest stock-market news.

But stock investing is, increasingly, solved. Index funds work, and people know index funds work, and they — and their boring cousins like smart beta and robo-advisers and the rest — are increasingly popular, and increasingly dominate the discourse about stock markets. They also dominate the structure of markets: “Listed companies today are on average larger, older, and more profitable than they were 20 years ago,” as Credit Suisse has noted, which seems like both a cause and a consequence of the shift to indexing. If companies are big and stable and predictable, just buying them all is a more sensible strategy; if the dominant strategy is to just buy all the companies in the index, then companies that are too small or silly for the index are less likely to go public. You can still get some speculative frenzy about Tesla Inc. or whatever, not to mention the crypto-micro-caps, but the stock market just isn’t as exciting a casino as it used to be.

The good news is there are lots of new casinos! There is bitcoin, and there are a million initial coin offerings, and now there is literal sports gambling vaguely dressed up as “investing.” These new casinos take some of their metaphors from the stock market, because the stock market is a well-known and appealing and respectable sort of casino. “I’m not a gambler, I’m an investor,” the frenzied day-trader used to say about his stock trades, back when it was fun to be a frenzied day-trader in the stock market. Now he can say the same thing about his bitcoin trading, or his ICO investing, or his sports gambling. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net



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