In this issue:

• Understanding Coinbase

• Security

• Different Abstractions

• Facebook Futurism

• SPAC Apathy

Understanding Coinbase

Is Coinbase an exchange, a broker, a hard-money bank, or a for-profit branch of a religion?

In one sense, Coinbase is an exchange: it's a venue where people buy and sell cryptocurrencies. One of the calls-to-action on their site is "View Exchange," and if you click you get this hypnotic real-time look at the Bitcoin market.

In another sense, Coinbase is a broker. It's a custodian for assets, including cash and more speculative assets. Like many such custodians, it also prefers that you use a cash-like asset with a little more pizazz—for a broker, that would be a money-market fund; for Coinbase, it might be USD Coin, a blockchain-based dollar substitute. Coinbase, like large broker-dealers, expedites transactions for customers and sometimes takes the other side in order to provide them with liquidity.

You might model Coinbase as a hard-money bank; most crypto assets try to be currency in some sense. While this produces lots of arguments, the net result of those debates is the realization that it's surprisingly hard to define a currency. All the obvious criteria exist on a continuum, which is why companies can refer to their equity as "currency for acquisitions," while certain currencies themselves are imperfect means of exchange. Brian Armstrong, Coinbase's co-founder and CEO, lived in Argentina during a time that one observer called "the world’s most annoying economic crisis," when a coin shortage made every cash transaction an exercise in mental math and a parodic form of Gresham's Law. If cryptocurrencies are currency-like enough to count, then Coinbase is mostly a bank that keeps 100% of deposits on hand in cash at all times, and that charges fees for currency exchange and other services.

Or, Coinbase might be a for-profit appendage to a religious phenomenon. Bitcoin, after all, has a departed founder, a unique eschatology, adherents with weird diets, and a sense that it's being persecuted by worldly authorities. Religious tourism and faith-related media are both big businesses. Why not a religious financial institution?

Coinbase is a bit of all of the above, and one thing that's especially remarkable about their S-1 is that they bend over backwards to walk through all the bear cases on their company and the assets it enables access to. Coinbase knows that their fate is tied to cryptocurrencies, and that convincing investors they're a viable business means convincing them that crypto is going to last.

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Elsewhere

Security

There have been many bull markets over the last twelve months—in SPACs, large-cap tech, commodities, and housing. There's also a bull market in security vulnerabilities. While the SolarWinds breach, the recent Exchange hack, and yesterday's security camera vulnerabilities are the most headline-worthy, the general pace of serious security issues is accelerating:

Google’s 0-day tracker spreadsheet has so far flagged 12 in-the-wild 0day attacks in 2021 (there were 24 total last year) and I know they’re missing at least two — the Sonicwall firewall attacks and the Accellion incident that’s also causing a world of hurt downstream.

Let that sink in: we’re not yet done with Q1 and defenders are in scramble mode to deal with 14 zero-day attacks across a range of platforms, products and operating systems.

News about breaches is a leading indicator of their consequences, but it's also a lagging indicator of attackers' capabilities: the news hits when they get caught, not when they succeed, which means the worst security-related headlines will arrive after the worst attacks are over. This makes it very complicated to call peaks and troughs in the security business cycle.

Different Abstractions

This is a very readable overview of post-Keynesian theory from @tragicbios. Importantly for investors:

Financial markets love [post-Keynesianism], because it does a good job explaining how the economy runs, which is helpful if your paycheck depends on understanding the economy. It gives good causal heuristics for understanding the impact of financial flows on production, and on the economy at large.

The piece correctly points out that classical and neoclassical economics rely on invisible abstractions—consumer preferences, utility—to build idealized assumptions about human behavior. But that problem is unavoidable; "demand" and "investment" are also abstractions, which hide important truths about the relative desirability of specific instances of those aggregates. Repairing potholes in a thriving city and building a bridge from nowhere to nowhere both show up as demand-stimulating investment, but their long-term payoffs are very different. Post-Keynesianism does give excellent guidance on one of the fundamental facts about the economy, that most of us are trying to pay the bills and that economic slowdowns have magnified effects when checks start to bounce. But the models remain imperfect.

It's especially interesting to think about companies embodying either a post-Keynesian or neoclassical approach. The post-Keynesians correctly point out that we don't smoothly move along supply and demand curves; shifts in supply and demand don't generally cause Apple to continuously adjust the price of an iPhone until the market clears. But some of the most profitable tech companies do switch pricing systems from sticky administered prices to market-based ones; selling ads through a real-time auction is much more lucrative than selling a big block of TV ad time during the upfronts. And while “utility functions” are theoretically invisible, they are a lot more visible to companies that can see exactly what people look at, what tradeoffs they make when they fill a shopping cart, what products they search for, and what features they fixate on. So there's some economic upside from building neoclassical systems that outcompete a stodgier, more post-Keynesian world. Elegant abstract systems are less realistic than the ones that are built off of empirical observations, but their elegance also means that they’re more powerful when they’re right.

Facebook Futurism

Facebook Reality Labs has a piece on the future of augmented reality and always-on computing. FB has been paying attention to this market for a long time, but changes in the ad business give it a new sense of urgency. From a privacy-conscious advertiser's perspective, one of the convenient things about augmented reality is that it gives a huge volume of contextual information about where someone is and what they're interested in. And it's all first-party data. From a technological and social perspective, augmented reality is interesting because it's the clear extrapolation of long-term tech trends—your screen gets smaller and closer to your eyeballs over time, while the latency between thinking of something and interacting with a computer to get that something goes down. But from a business perspective, it's a notable development because it will give Facebook exclusive access to a stream of real-time data that, while mostly noise, will contain useful hints for ad targeting (in addition to representing lots of exclusive inventory).

SPAC Apathy

Shareholder votes are typically a formality, and occasionally rise to the level of a political campaign. As in politics generally, a small set of people have very strong interests in a specific outcome, a larger fraction have default voting behaviors that don't change much, and a small set of low-interest, low-information voters get most of the persuasive attention. Unfortunately for SPACs, 1) shareholder votes generally don't get wall-to-wall media coverage, especially if they're over procedural issues like extending the SPAC's deadline to do a deal, 2) retail investors are less likely to vote, and 3) some corporate actions require a minimum number of affirmative votes, rather than being based on a simple majority of votes cast. As a result, some SPACs are having trouble closing deals because they can't get the votes ($, FT). Investing in a pre-deal SPAC at its net asset value is a sort of lazy call option; it's a chance to either get the cash back or get a stake in a business. But selecting for laziness turns out to have downsides.