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Introducing the FTC

Jul 14, 2022Andrew KolodyUncategorized

Headline: Next, we see, the FTC

Body: The Federal Trade Commission (FTC) is an agency of the Federal Government that was started by President Wilson in 1914 as a part of his “Trust-busting” strategy. They have 2 related missions:

Protect Consumers—If you remember the SNL skit on the “Baggo” line of toys, featuring the “Baggo Glass” shards of broken glass in a thin plastic bag, sold as a children’s toy, the FTC would be the agency to ensure that this “toy” does not hit the marketplace.
Promote Competition.

The FTC is vital to the delivery on both missions, and does a lot of work to help educate consumers about potential dangers. When there are problems, the FTC will work with law enforcement agencies to achieve justice. They even work internationally with their partners.

Just a word of personal note: The FTC is not to be taken lightly. I have taken a course on writing financial newsletters. Shortly after completing the course, I was looking around at several publishers of these newsletters for potential employment. I vividly remember one website that was over-written with a prepared statement from the FTC. It had completely shut down the website! They are an agency not to be trifled with!

Protecting Consumers and Promoting Competition.

The FTC protects consumers by stopping unfair, deceptive or fraudulent practices in the marketplace. Investigations are undertaken and suits are filed if deemed appropriate. A very large portion of their portfolio is to educate consumers on what they can expect within the marketplace. Less abstract, the FTC runs the National Do Not Call registry, and this affects your life each and every day.

The other portion of their mission is about ensuring competition within the marketplace. Without sufficient competition, a firm could easily develop a niche where it offers ultra-expensive or inappropriate goods. The FTC works many anti-trust cases to ensure that consumers get access to responsibly priced goods and services that meet their needs.

What does the FTC do?

Amongst its primary activities, the FTC investigates all types of fraud complaints and also investigates pre-merger applications for anti-trust violations. Please remember that the FTC is empowered to investigate a single company or an entire industry, and then file a consent order or file an administrative complaint, to be heard in front of an Administrative Law Judge. They also investigate scams and instances of deceptive marketing.

Are there specific examples of the FTC doing their job?

In the early 1980s, the FTC took on the funeral home industry, and forced them to publish a General Price List for products and services. In the later 1990s, this program was tightened when the Funeral Rule Offenders Program allowed them to pay a fine instead of going to Court. In a more recent example, the FTC ordered Amazon to pay over $61 Million to some Amazon drivers, since they were unfairly retaining a portion of their tips. Currently on-going, there is a fight over the Right to Repair.

The Right to Repair.

Ever buy a new cellphone and then read the legal stuff included? Nobody does. But in the same pack of literature, there is a section that tells you, essentially, that Mecca and Rome will burn simultaneously if you open your I-Phone or other Apple device. Have you seen this? They are trying to get you to either go to the Apple Store or buy a replacement device each time.

Recently, the FTC commissioners voted unanimously to allow the Right of Repair. This is very important for at least 2 reasons:

Saves consumers a lot of money
Minimizes sources of E-Waste.

The unanimous decision sends an important signal that more legal action and regulation are on their way that will work to protect the Right to Repair for the individual consumer.

The Verdict

The FTC serves a very important role within the consumer protection area. Not too many people pay attention to them because other agencies have a sexier portfolio of responsibilities. But, as it involves the individual consumer, it is difficult to think of a more important government agency.

If you DO find something you wish to report to the FTC, you can file your Complaint by calling 1-877-FTC-HELP.

REFERENCES

https://www.ftc.gov/about-ftc

https://www.investopedia.com/terms/f/ftc.asp

https://www.csmonitor.com/Business/The-Circle-Bastiat/2010/0715/Does-the-FTC-really-protect-consumers?cmpid=mkt:ggl:dsa-np&gclid=EAIaIQobChMI6PfL2JaL8gIVbm5vBB37owyvEAMYASAAEgIUI_D_BwE

https://www.wired.com/story/ftc-votes-to-enforce-right-to-repair/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

What is the SEC, and no, they do not play basketball.

Jul 8, 2022Andrew KolodyUncategorized

Headline: The SEC. You can’t spell security without it.

Date: 8/1/2021

Body: The next body that is very important to the functioning of the securities markets is the SEC. They also have a large mandate, and this body is an agency of the Federal Government.

What Is the Securities and Exchange Commission (SEC)?

The Securities and Exchange Commission (SEC) is a Federal Government agency with the responsibilities of:

Protecting investors.
Keeping the financial markets fair (and worthy of faith)
Facilitating Capital Formation

This regulatory body was started in 1934 in an attempt to create more faith in the fairness of the capital markets within the Great Depression. Usually, to sell a security, the brokers must register with the SEC.

If the SEC sees a civil infraction, they are empowered to assert:

Monetary penalties.
Issue injunctions to ensure that the infraction is not repeated. If it is, then “contempt of court” charges might apply, and that’s a criminal offense. People go to jail over this.

You’ve mentioned “Faith” twice already. How do they do this?

One large purpose of the SEC is to force reporting requirements upon the publicly traded companies. They must offer annual reports, and (usually) quarterly reports to the SEC (10-K and 10-Q respectively.) Also, when there is a significant change in something, they must publish this on an 8-K. These forms are all searchable at the SEC site called EDGAR. This added transparency should serve to bolster the faith in the securities markets.

What does the organization look like?

There are 5 commissioners who each serve a 5-year term. By Law, not more than 3 commissioners can come from the same political party. There are 5 divisions to the SEC:

Division	What do they do?
Corporate Finance	Makes sure that investors have enough information to make informed investment choices. This division has responsibility for EDGAR.
Enforcement	This division enforces civil penalties and works with the DOJ if there are criminal offenses to prosecute.
Investment Management	Regulates Investment companies and federally registered investment advisors.
Economic & Risk Analysis	Presents information on economics of the current markets and data analytics.
Trading & Markets	Maintains standards to ensure fair, orderly and efficient markets. (If this is not done, nobody would feel secure enough to trade, and the securities markets would dry up.)

The SEC is related to FINRA as it provides oversight. Further, when an entity wishes to appeal a FINRA decision, the SEC is the first-level appeal for that entity. They also are in charge of a Whistleblower program that can award bounties of up to 30% to an individual.

There were nearly 2,500 reported public offerings in 2019 at a median size of $300 million and an average amount raised of $489 million. To make this happen in an efficient manner, people, (regular people like me and you) must have faith in the markets and trust in the numbers reported.

The Verdict

One may be excused for thinking that I went all metaphysical on you with the repeated mentions of the word “faith.” But at root, that is the foundation of an efficient marketplace. If you go to the supermarket and pickup a TV dinner to have for supper, it is faith in that brand (and secondarily the retailer) that the product that you are taking into your body is safe (and hopefully semi-nutritious.) THAT is why you deem it acceptable to trade your hard-earned cash for that meal. In a similar manner, the financial markets have much branded information for us to consume. The SEC serves as a check to ensure that the information provided is helpful and accurate in making investment decisions. Is the SEC perfect? No, but it’s a far-sight better than an unregulated market.

REFERENCES

https://www.investopedia.com/terms/s/sec.asp

https://www.sec.gov/about/what-we-do

https://www.thebalance.com/u-s-securities-and-exchange-commission-3305995

https://www.fool.com/knowledge-center/what-is-the-sec.aspx

Introduction to FINRA.

Jul 4, 2022Andrew KolodyUncategorized

Headline: What the Heck is FINRA?

Body: In the next few blog posts, I thought it might be useful to better understand some of the characters within the “cat & mouse” games within the financial markets. The mice are the small businesses that are trying to exert maximum advantage within the market without running afoul of the Law. Don’t underestimate the power of mice:

There are a lot of them.
Mice have very sharp teeth (really like small tusks.) In a similar manner, many of these small businesses are run by men and women who are also very sharp, and very aware of their market environment.

The cats are usually the governmental agencies meant to protect citizens from unethical practices. But in this first entry, I am going to throw you a curve and introduce more of a fox. Related (closely) to the cat, the fox behaves differently. In this manner, the organization, FINRA works differently, to obtain a similar objective.

What is FINRA?

The Financial Industry Regulatory Authority (FINRA) is actually a not-for-profit organization and works under the authority of the Securities & Exchange Commission (SEC). FINRA was created in 2007 when the NASD combined with parts of the NYSE (the regulatory portions.) It has primary responsibility for rule-making, ensuring that the rules are followed, administers the tests taken by the people who want to be traders, and educate the investors in the General Public. They are a pretty active organization and brought 808 disciplinary actions, and levied $57 Million in fines in 2020 alone. They also referred almost 1,000 cases of fraud to the SEC. It also maintains an online database called BrokerCheck. Using this database, investors can see if their broker has any outstanding complaints against them.

FINRA sounds great!! What is the downside?

Critics claim that FINRA doesn’t do enough to protect investors. They have 2 main arguments against it:

There are current brokers who have multiple complaints against them.
They do just enough to keep the Public Trust.

I would argue that they are doing enough. The mandate seems to be to lend transparency to the sometimes-opaque financial markets. “Buyer Beware”, still applies to the financial markets, and the presence of FINRA gives the investor enough transparency to make their own choices in view of objective facts. For this reason, I would opine that FINRA is in fact working appropriately. Even more than this, FINRA operates without a cent from the taxpayers.

What is the difference between FINRA and the SEC?

I have looked into this somewhat, and I think I found it. Though FINRA can fine members and institute other civil penalties, the SEC is a government agency, and only the SEC can impose criminal penalties. This is a law enforcement procedure, so it seems reasonable that this task is done by a Federal Government agency. Importantly, if a business disagrees with a penalty asserted by FINRA their first appeal is with the SEC.

Could I take a FINRA Test and become a broker or trader?

The short answer is probably not. To take such an exam, your employer has to explain to FINRA your need for licensure. If they do, FINRA offers a variety of licensure exams, including:

Series 7: The Series 7 General Securities Representative qualification is perhaps the best known, mandatory for Financial Advisors and certain other sales positions.

Series 6: The Series 6 qualification allows the holder to transact business in a much more limited set of investment products than Series 7. These are essentially limited to packaged investment products such as mutual funds and variable annuities.

Series 63 and 66: The Series 63 and Series 66 exams cover state securities regulations, and also may be necessary for most Financial Advisor positions.

Series 65: Series 65 is the Uniform Investment Adviser Law Exam which qualifies the holder to be an investment advisor representative.

The Verdict

FINRA is not a government agency and is therefore often overlooked by most people. But, what they do is VERY important. I have the privilege of knowing some of the fine professionals who work there and they take their jobs quite seriously. In my readings, I think I would liken the financial markets to a pool environment. There are chairs mounted high over a pool and sometimes the lifeguards are here, but often they are better thought of as the lookouts. The real lifeguards are often at the pool edge, ready to jump in, if necessary. FINRA seems to serve the function of lookout, while the SEC serves the function of the lifeguard. Both are needed, and both are vital to the safety of the public.

REFERENCES

https://www.investopedia.com/terms/f/finra.asp

https://www.fool.com/knowledge-center/what-is-finra.aspx

https://www.thebalancecareers.com/financial-industry-regulatory-authority-1287014

https://www.investopedia.com/ask/answers/how-does-finra-differ-sec/

The Futures Market on Cryptocurrencies.

Jun 18, 2022Andrew KolodyUncategorizedcryptocurrency

Headline: The Futures of Crypto

Date: 3/26/2022

Body: OK, I have to make a confession. From time to time, I become scared by how many people are piling into crypto. But I was absolutely terrified when I read about cryptocurrency futures markets.

Why does this scare you (me) so much?

Let’s break down both parts, cryptocurrency and futures. First of all, cryptocurrency is really not based on well, anything (There seems to be a perverse bit of pride on this matter too.) Usually, when a fiat currency bounces around, you can look at the industries within that nation to see their fortunes ebb and flow with the value of currency. But, with a cryptocurrency, there is no such industry to look for a correlation. This is scary point #1. Said a different way, “Bitcoin and other cryptocurrencies have already sucked an insane amount of money from the real economy,” said Bart Naylor, financial policy advocate at the consumer group Public Citizen. “Enabling more gambling under the banner of the SEC debases what’s supposed to be the gold standard of world securities markets oversight.” Scary point #2 is the futures.

In the beginning, futures markets were a good idea, in that they helped to moderate risk. For instance, an airline might offer a futures contract to an aviation gas distributor. By executing this deal, the airline gets a definite price, and the distributor gets assured cash. Both parties have to give up the possibility that prices could drift in the direction of their benefit. (Farmers often trade uncertainty in a similar way.) But, when you are speaking of cryptocurrency, the benefits obtained and fees to be paid are both undefined, so the trading of risk cannot be accurately estimated. Since this derivative is now not effectively trading risk, what is the investor doing? Effectively, they are now going to a casino. This is the crux of my concern.

Another thing that caught my attention is the amount of leverage that investors are given. (Leverage means debt.) in 2019, an offshore exchange was allowing up to 125 times for leverage. They have moderated to only allowing usage of 20 times, but this is itself very worrying. As you might remember, the housing crisis was triggered by leverage, allowing up to 30 times leverage. But, these were large institutional investors, and even with their experience, they also went to excess and nearly bankrupted the American public. Allowing for 20 times leverage for normal investors seems rather dangerous to me. Please recall also, that these futures contracts are extremely complex instruments, and unless the investor does exhaustive research, one can easily be misled.

Is there a case for trading cryptocurrency futures?

Well, yes, sort of. Some assert that the futures market is regulated by the Commodity Futures Trading Commission (CFTC) and this governmental involvement might make institutional investors less squeamish. Their argument is that with the larger investors inside, the smaller investors might derive a smoother ride. But this looks somewhat doubtful to me. They go on to argue that because futures contracts are settled in cash, there is less risk. I am also somewhat dubious of this logic too, because of the extreme volatility of cryptocurrencies. There is also a self-certification process for many of their procedures and, with the majority of exchanges being in other countries, I don’t have a lot of faith in the accuracy of self-certification programs under the CFTC.

Are there Special Considerations when considering futures contracts for cryptocurrency?

The futures market is well-developed. But, the futures market surrounding cryptocurrency is embryonic. So, there are a few concerns that are special to this neighborhood of the futures market. Therefore, it is unlike other futures trading for other asset types. Here are some special considerations that you should contemplate while trading bitcoin futures.

The bitcoin pricing model seems to resemble the model for the futures contracts, and this is good. Bu, the futures market appears to be much more illiquid, not allowing investors the quick exit they might be forced to make.
The regulatory environment for cryptocurrency futures appears cloudy. Even though the U.S. is making efforts to investigate this and regulate it properly, most of the exchanges are located offshore, and beyond U.S. Law.
Derivatives were developed to hedge risk. (For example, one might be forced to make a deal in a foreign currency and the derivative was there in case the foreign currency was substantially devalued. You lose money on the deal, but you gain a little on the derivative, mitigating the loss. With cryptocurrency futures, the “underlying asset” is the same as the one being hedged, so there is no protection being afforded by the derivative.

Rest assured, your mature, deliberate Federal Government is moving with all due speed, and all constituencies are working together flawlessly.

Sorry, I guess that might have been a bit too much. To the surprise of nobody, the different parts of the Federal government are all claiming that they have the most important role in this drama.

As a result, US regulation of virtual currencies has not been too incredibly organized. Each agency has been grabbing for a little piece of regulation of cryptocurrency futures:

The Internal Revenue Service (IRS) treats virtual currencies as property subject to capital gains tax. So, say you bought a tranche of cryptocurrency for $5,000 in Year #1. At the end of Year #3, you sell that piece of cryptocurrency for $12,000. You would be taxed on that $7,000 capital gain.
The Treasury’s Financial Crimes Enforcement Network (FinCEN) monitors Bitcoin and other virtual currency transfers for anti-money laundering purposes. I work in the Treasury department and there is a huge amount of focus on anti-money laundering (AML) activities.
The Securities and Exchange Commission (SEC) takes increasingly strong action against unregistered initial coin offerings.
The CFTC also has an important role to play. In 2014, the CFTC declared virtual currencies to be a “commodity” subject to oversight under its authority under the Commodity Exchange Act (CEA). Since then, the CFTC has taken action against unregistered Bitcoin futures exchanges (BitFinex),

The Verdict

When they started flying their kites and then airplanes, the Wright Brothers must have had some harrowing experiences. Crashes must have been epic and frequent. The futures markets for cryptocurrency are quite similar. But, in this case, we are trying to build the plane that should carry us as we are in midair. So, I don’t believe that I would recommend this to anybody.

REFERENCES

https://www.investopedia.com/articles/investing/012215/how-invest-bitcoin-exchange-futures.asp

https://www.cftc.gov/sites/default/files/idc/groups/public/%40customerprotection/documents/file/backgrounder_virtualcurrency01.pdf

https://www.politico.com/news/2021/10/19/sec-bitcoin-funds-crypto-516218

https://www.ft.com/content/5c21e984-9acf-4293-8da2-202d125c332a

What happened to BitConnect?

Jun 13, 2022Andrew KolodyUncategorizedcryptocurrency

Headline: BitConnect is now dis-connected?

Date:

Body: Continuing with the thread of scams within the high-tech world, I was just watching a podcast that mentioned BitConnect. They had a 30-second snippet from a company meeting, and it looked like a rock concert was being held in the compound of a very secretive cult. Then I found this disclosure by the DoJ. “BitConnect Founder Indicted in Global $2.4 Billion Cryptocurrency Scheme.” It certainly made me want to know more.

Quick caveat here. This is an indictment, and he has not been found guilty. (It is sometimes said that you can indict a ham sandwich.) But, unless they had a good case, I don’t believe that the Federal Government would be prosecuting him for this crime. But, until convicted, he is to be considered innocent.

What is a Ponzi scheme?

It is not when a leather coat wearing greaser runs in the room and says “AAAA!!” That’s a Fonzi scheme, and very different. A Ponzi scheme is where you find a few gullible and greedy investors who sign on to get incredible investment results. Each one then tells their entire network about the returns etc. All the while, the first investors are actually being paid out of the investment of the subsequent investors. For a short period of time, the instigator of the scheme looks like a real brainiac hero. The key here is that the scheme always falls apart at the end, and the hope for the instigator is to be on a tropical beach (in a non-extradition country) by the time the jig is up. The key for law enforcement is that the “investment opportunity” is a sham. In this case, a $3.4 Billion sham.

In somewhat plainer English, what Mr. Kumbhani is accused of doing is suggesting that BitConnect had some sort of proprietary software that would allow them to make money from the extreme volatility of the cryptocurrency markets. Investors would stake their own cryptocurrency with BitConnect in the hopes of earning a handsome return. He ran this scheme for about a year, and then shut it down. (Probably due to cease & desist letters from Texas and North Carolina.) The scale of this shutdown should be placed in context; Within a few hours, the cryptocurrency was trading at an 80% discount. People got really hurt.

At the same time, he pressured his promoters to manipulate the market value of its own cryptocurrency to make it appear to be still valuable. There also seems to have been some flavor of money laundering going on among cryptocurrency wallets around the world and any number of exchanges. (This is sexy stuff, isn’t it? Sorry, I probably should’ve warned you.)

He faces these fraud charges in addition to wire fraud. Currently he is “at large” but I suspect that this will change when a reward is offered. The Federal Government machine has a very long memory too.

OK, this is a nice bedtime story. Why tell me?

I am telling you this story to arm you against the fraudsters of this world. There are a couple of very serious things that could be done by the “normal person” to keep themselves from falling victim to this:

I have said it before, I’ll say it again, if something appears to be too good to be true, it probably is. If the promised returns appear to be astronomical and promise the stars, look carefully to be sure you aren’t being mooned.
Do your own research. When asked by a reporter how his software works, Mr. Kumbhani said that he cannot explain anything for “privacy reasons.” If you ever see this, you should carefully consider just what is being hidden from view.
Greed is a powerful emotion. If you are to be a successful investor, you must find a way to avoid being blinded. Many of my friends have decided that they must be able to convince their wives. If they can’t, then there’s probably a reason, and they pass up the opportunity. In the alternate, if you are not married, you can have a “conversation” with a friend, or perhaps yourself. If you can write a letter to a friend explaining this opportunity, and then re-read it a few days later you still get excited, then you might be on to something. Have a system of some sort for slaying this green-eyed monster.

The Verdict

“Crime, particularly crime involving digital currencies, continues to transcend international boundaries,” said Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division. This ability to electronically and instantaneously send money to all corners of the world, and transact in all different currencies, make it very much more possible for people to run schemes and successfully launder the funds. Fortunately, the governments of the world are slowly coming to understand a bit about the new threats they face. As far as the U.S. is concerned, there is a very powerful law against wire fraud of all types, so it is difficult to envision what illicit activity will not be prosecuted. Especially, as in this extant case, the man who was the lead promotor for U.S. accounts has already pleaded guilty to conspiracy charges.

The take-home point of this piece is simple. On your investment journey, there will be stories of exotic investments in far-off lands, all the time. When you hear of these stories, ask yourself what the source really is. After all, if the opportunity is real enough to believe in, would you be dealing in rumors?

REFERENCES

https://www.justice.gov/opa/pr/bitconnect-founder-indicted-global-24-billion-cryptocurrency-scheme

https://www.cnn.com/2022/02/27/business/bitconnect-ponzi-scheme-satish-kumbhani/index.html

https://www.wsj.com/articles/sec-sues-bitconnect-and-founder-alleging-massive-cryptocurrency-scam-of-world-wide-investors-11630535853

https://www.latimes.com/california/story/2022-02-26/cryptocurrency-founder-charged-in-2-4-billion-fraud

DAO!!

Jun 9, 2022Andrew KolodyUncategorizedcryptocurrency

Headline: MMMmmmmm… DAOnuts!!!!

Date: 11/18/2021

Body: First of all, with apologies to Homer Simpson, “D’oh!!” What the heck is a DAO? Is it:

A stock index (following the Dow.)
A strain of Eastern Philosophy (E.g. Taoism)
An exclamation one employs when one hurts one’s self in a totally avoidable manner.

A DAO is none of these things. DAO stands for decentralized Autonomous Organization. It does sound kind of funny, but stay with me. This type of financing came to my attention when looking at Twitter, and there was an announcement that a group of investors had just purchased an original edition of the Constitution. In this case, a DAO had pooled virtual currencies from several different parties, to purchase the very real document.

Think of this like an IPO. When a company decides to “go public”, they issue stock and then find an investment bank. That bank, in turn, finds a bunch of partners to purchase the stock, and this is called the underwriting syndicate. The DAO is simply another kind of underwriting syndicate, and they use (likely Ethereum) virtual currencies to buy assets, thus forming a decentralized group. No one government or Bank is in charge. Apparently, the concept for a DAO was invented all the way back in 2016 in an effort to eliminate human error or manipulation by placing decision power in the hands of the computer, using human-written rules. (Come to think of it, the investment function seems to act like an index mutual fund.) Although the initial DAO expected to be out of business at the end of 2021, there seems evidence to suggest that other DAOs are possible in the future.

So, what the problem is?

In a word, hackers. In a few words, the DAO framework has some well-known baked in vulnerabilities, and in 2016, hackers gained control of the equivalent of $50 Million USD.

The other problem is that of who regulates it. It was found, in July 2017, that the DAO sold securities, so it was illegal under SEC regulations. Under the Securities Act pf 1934, in order to sell securities, the issuing entity must go through registration, which is an onerous process. (There are a few exceptions to this registration, but this is the general regulation.) The SEC found that the DAO was offering securities, and did not qualify for an exception, so registration was mandated. For the record, though, the report did suggest that future determinations would be based upon the facts and circumstances of each case. They go on to suggest that they are intrigued by the possibilities:

The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” said SEC Chairman Jay Clayton. “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.

So, it would appear that in this one case, the DAO was on the wrong side of regulation, but, with subtle tweaks, there might be a tenable position. Instead of placing anybody in prison, the SEC is instead focusing upon education of investors to make an informed choice.

History does have a way of repeating itself…

Just last year, a DAO set their sights on buying 1 of the 2 remaining original copies of the Constitution (the other 11 are owned by museums and governments.) With only $5.5 Million, they secured the prize. Said one expert, “I’ve found it increasingly fascinating to watch this Cambrian explosion of cool web projects over the last year. The opportunity to actually build one out was something unique,” This was said by Graham Novai, one of the organizers of the DAO that purchased the Constitution. “The Constitution is incredible,” he says, bidding for it “is this once-in-a-lifetime thing.” But, it gets even more interesting, and potentially darker.

We also saw the potentially darker side of DAO-style activities when we saw the activity within AMC and GameStop. People have an understandably difficult time shedding a tear for billionaires trying to get even bigger by putting their money with hedge funds… and getting squeezed like an orange. But, if one reflects for just a moment, what if that DAO decides to turn their investing firepower on the investments I have? Then, your reaction might be a bit different. In many ways, a DAO is a super-charged mix of the elements that have recently interwoven finance and the internet: A previously unknown group of young people are today able to raise millions of dollars overnight, a task that would’ve once fallen to pedigreed financiers embarking on a multi-week, if not multi-month, sales trip.

The check we have on this new system of finance running amuck is, frankly education. Even within a hedge fund, there are some legal protection. (e.g. if there is a Bankruptcy, etc.) Within a DAO model, there is NO legal protection at all. Ever heard of the Squid Games? The hucksters floated a token called Squid, and it rose in valuation FAST!! When it became manifest that it was not connected with the Netflix program, the hucksters disappeared overnight with $2.5 Million. If we can educate our young investors just how volatile this area is, perhaps we can also teach them how to lower the temperature, and calm the volatility, a little bit.

But, that speed and instability seems to be the really important attribute of the DAO. It is FAST! The Constitution DAO was convened and organized mainly over Twitter and Discord, and within less than a week, had the $5.5 Million in financing from 11,000 people. Interestingly, the organizers are not paid. Often, after a successful project, members will choose to give the organizers a “tip.” Despite this lack of assured compensation, the organizers are very motivated. “Candidly, it’ll be fun to be bidding against those people,” says another Constitution DAO organizer, Brian Wagner, 30. As a day job, Wagner is cofounder of Roadtrip FM, a music streaming startup. “They’re billionaires—old collectors who just want to lock this stuff away and keep it to themselves. That’s why everyone wants to get involved with this because people can actually collectively own this and decide what to do with it.” So, given this enthusiasm level, I think we are likely to see more of these in the future.

The Verdict

Do I think that the mighty corporation is the best, most optimal business structure? Not always, and not at all times. But, it does certainly seem central to our economy. In a similar sense, the DAO organizations just seem inevitable, and powerful. For this reason, we must come to understand them, and perhaps regulate their most egregious potentially damaging attributes. Perhaps there will be a Federal agency given the role to learn about these organizations and in turn, educate taxpayers. Only if we are fully informed can we make good investment decisions, both individually and collectively.

REFERENCES

https://www.forbes.com/sites/abrambrown/2021/11/16/what-is-a-dao-us-constitution-sothebys-goldman/?sh=7311285b1e46

https://www.investopedia.com/tech/what-dao/

https://moneyweek.com/investments/alternative-finance/bitcoin-crypto/603213/decade-of-the-dao-decentralised-autonomous-organisation

https://www.sec.gov/news/press-release/2017-131

Marketing your NFTs.

Jun 1, 2022Andrew KolodyUncategorized

Headline: How to develop a market to sell your own NFTs

Date:

Body: OK, we have approached all manner of subjects related to NFTs and cryptocurrency. One thing we haven’t touched on is, when you have an NFT, how do you go about creating a market for it.

OK, first the basics…

Cryptocurrencies and NFTs have to be thought about differently. Cryptocurrencies are securities since they are fungible and almost fantastically divisible. NFTs are unique and are therefore non-fungible. They are also (ostensibly) not divisible, though there are some investment pools that seem to belie this attribute.

What gives the NFT its value?

The feeling of owning a unique thing is the basic draw for investors. The value of the NFT also seems to have some part in loss of anonymity. When you purchase, say, one of the bored apes, you often use this image as your online avatar, and it becomes, in part, a piece of your identity. It is an incredibly personal decision, and this is where you can get into trouble. If you do want to sell it eventually, if some people admire it as much as you did, then you might make a handsome profit by selling the image. On the other hand, if it now seems inappropriate to many people, you might have trouble selling it at all.

Case in point is the artist named Beeple. He created an NFT, and then sold it at Christie’s Auction House for $69 Million. Truly, this was a record-breaking sale. But, this is not a one-off. By November of 2021, that year alone, over $10 Billion of NFTs had been sold online.

How do you market an NFT?

Most people would just “mint” their NFP into the OpenSea site, and then try to sell it. But to really get the opportunity for a nice sales price, you need to market the image through social media influencers and the like. Make sure that they “talk up” the value being sold. It is also important (if possible) to get experts to blog about it, and write articles in e-zines.

Just as in other types of marketing, the secret is really in developing and nurturing relationships. Perhaps you have a handful of wealthy people who are really into digital art, and you also have relationships with several businesses that might like to invest in digital media. Both of these groups would be important to notify before an important sale (of your NFT.)

What are some channels to consider?

Social media advertising is nice because, people who are exactly there, have chosen to be exactly there, and are therefore prepared for your information, and prepared to perhaps make an associated purchase. Good old-fashioned Public Relations is good to promote your NFT and to promote you as an expert who would know the unique value of the token. Display advertising through Google and others is a great method to find qualified prospects who might bid on your NFT. You pay per 1,000 impressions, so, you can be really careful with our marketing budget. Finally, Email marketing can be one of the most targeted and important marketing types. It is important because when building your own email list, these individuals have affirmatively chosen to get updates from you. So, you are really preaching to a choir already committed to listen to you. (In fact, some businesses have found out that each dollar invested in email

Just as an example, Coach has some animal characters they use in their ads. They have made NFTs of these animals with a promise that if you purchase one, you will also receive a unique customized Coach bag. This is a very effective way to re-enforce the feeling of exclusivity, which is so central to their brand.

So, what’s REALLY involved in creating an NFT?

The real promise: NFTs as the basis for a multifaceted digital consumer connection. Take the bored ape yacht club for instance. When you purchase an ape, you are purchasing an avatar for your use in online activities. But, you are also purchasing entrée into special parties and offers only for those who have apes. You are also making a contribution to preservation of ape habitat. In all these things, you are publicly defining yourself in a manner in which the metaverse of your choice will hopefully value your contribution highly. When you strip away all of the other things, NFTs are really there to drive engagement with the brand. It might be the brand of “be a nice guy” or it might be the brand of “I only shop for and purchase the BEST! Companies desperately want to get this conversation started now, and the want it to point in their positive direction.

Step	Comment
Pick your item.	Make sure that you have all ownership rights.
Select your blockchain.	Usually Ethereum is recommended.
Setup your digital wallet.	Usually at Coinbase or other trusted site. Using MetaMask wallet is usually OK too.
Select your marketplace	OpenSea is usually seen as the best regulated.
Upload your file	There are usually excellent instructions on how to mint your own NFT creations.
Set up the sales process.	The particular NFT exchange you choose will likely have a couple of different auction-like mechanisms for price discovery. Based upon your NFT, make your choice.

The Verdict

NFTs are here to stay. They will only continue to multiply and they will probably morph from simple pictures and video images into 3-D pictures and beyond. Your NFT will become your online identity and perhaps serve a few functions within the offline world too. This is not a passing fad like Beanie Babies, but it is challenging. The challenge comes in finding art (or music or whatever) will continue to be relevant for a long time after it has been minted. BAYC really bit hard into a complex of feelings shared by so many people; The search for identity, the search for something fulfilling to do with our lives, the search for other searchers. They hit a homerun, there is no debate. The real debate is whether or not somebody equally creative can tap into something so fundamental too. If so, then you have an NFT that is really worth something.

REFERENCES

https://www.forbes.com/sites/forbescommunicationscouncil/2022/02/17/what-are-nfts-and-how-do-you-market-them-effectively/?sh=6820f9b2763f

https://www.entrepreneur.com/article/417186

https://hbr.org/2022/02/how-your-brand-should-use-nfts

https://www.fool.com/investing/stock-market/market-sectors/financials/non-fungible-tokens/how-to-make-an-nft/

The Last Auction Hero

May 19, 2022Andrew KolodyUncategorizedcryptocurrency

Headline: Different types of auctions

Date: 4/14/2022

Body: So many of us are used to the image of an auction. A richly paneled room with hundreds of well-dressed men and women, each armed with a paddle. The price goes up and up and up until there is no other higher bid. This is one type of auction, but there are so many other types, and I since cryptocurrencies, NFTs and other digital assets are so often placed into an auction, I thought that reviewing the major types of auctions that there are would be a productive use of time. (Lest you think this is an outdated, uninteresting part of the dismal science, the most recent Nobel Prize in Economics went to a man who did work on different styles of auctions.)

What Is an Auction?

An auction is a sales event where there is a process of “price discovery.” The price changes up or down, until there is one person with the highest bid. It is popular with both sellers and buyers because they both believe that this format of price discovery will lead to a fair value. (I know that some of these auctions can lead to seemingly ludicrously high values for some assets, but really, that winning bid is evidence of “what the market will bear.”) In the largest level, they can either be closed (where individual bidders don’t know about competition) or open (like at a classic car auction, where the owners are aware of the competition.

Are there different types of auctions?

Yes, as mentioned above, there are open and closed format auctions. Beyond that, there are a few more to be aware of.

Government Auctions

Sometimes, assets come into possession of the federal or municipal governments, and to get some cash, they will auction these items. As an example, I have a friend, Scott. Scott has always wanted to own a Ferrari. He did his homework and decided exactly what he wanted. He scanned the government auction lists, and one week, he found one that had been seized in a legal proceeding. He got a great price, the government got a little money, and everybody was happy. Except for the miscreant who originally purchased the Ferrari.

Traditional (English) Auctions

In a traditional-style auction, as explained above, the starting point is usually pretty low, then works its way up, until there is no bidding. The winner is the last bid.

Dutch Auction

Most often, this refers to an auction that starts at a very high value. The price of the item drops gradually, until there is one bid.

Silent Auction

In my limited experience, this is most often a sort of fund raiser activity for a non-profit entity. I belong to an organization called the American Nystagmus Network, and they have a conference every 2 years. At that conference, they have a printed program with advertisements. In recompense for printing an ad in the program, many vendors will donate a prize (e.g. a spa package or perhaps a gift card.) These prizes will be placed on a long table, and a sheet of paper under each one. If interested in an item, you write your name below, and the amount you are willing to donate to the organization and to hopefully win the item. It is a great way to make money for a good organization.

Double Auction

In this type of auction, both buyers and sellers publish prices they are willing to pay or accept. They are matched, and then a transaction occurs under the watchful eye of a 3^rd party. OK, this one is most often within the financial markets, so it is very applicable here. Picture the NYSE circa 1992. There is paper flying everywhere, and people wearing different color jackets are running around the exchange floor. Hand gestures flash faster than gang signs in Compton. When a seller finds a matching buyer, the exchange is done and the records are updated for both parties.

There is one other wrinkle that I know of…

When growing up, there was a development across the street, of about 20 lots. The original developer went bankrupt, and there was an auction held right in the midst of these lots. (I remember this well.) What I most remember is what happened at the end. Each lot was auctioned off serially, one at a time. But, at the end, the auctioneer added up the value of all successful bids for the 20 lots, and gave everybody one last shot to bid higher on the whole collection of 20. This detail caught my eye, as I was not used to it.

Advantages and Disadvantages of Auctions

Advantages

You can often find rare items at an auction.

Buyers can often get bargains at an auction.

At an auction, the seller is in control the whole time.

Disadvantages

Some potential buyers might pass up the auction due to the competitive nature of the event.

The fees to have an auction can be very high. (For instance, there has to be a venue, and rental expense could be high. There is also the auctioneer who has to be paid.)

Are there legalities that I should be aware of?

There are a couple.

When you enter a bid at an auction, it is considered entering into a legally binding contract. Once you make that bid, if you back out, you can be sued.
Collusion is possible at an auction, and in some countries, this type of bidding is illegal. Check your local listings…
If nobody bids on an item, negotiations can be executed between buyer and seller.

The Verdict

Auctions are so well-engrained in our capitalist system that is difficult to imagine our world without them. And the tradition of auctions is not limited to the American system. In many portions of the world, it is just expected that negotiations will take place, and people seem almost disappointed if you do not use an auction-like negotiating tactic. The trick here, seems to be that you have to know the rules and customs of business before you take part.

REFERENCES

https://www.investopedia.com/terms/a/auction.asp#:~:text=of%20the%20bidding.-,Examples%20of%20auctions%20include%20livestock%20markets%20where%20farmers%20buy%20and,a%20host%20of%20online%20auctions

https://www.econport.org/content/handbook/auctions/commntypes.html

Four Common Types of Auctions

https://onlinelibrary.wiley.com/doi/pdf/10.1002/9781119205098.app4

NFT(ease?)

May 14, 2022Andrew KolodyUncategorizedcryptocurrency

Date: 4/12/2022

Body: Everybody has had some experience at an old style arcade, right? For $5, you got a handful of metallic tokens. Each one was of the same value, and looked, felt and behaved the same inside of games. Because they are all the same, and can therefore stand in place of each other, they are considered “fungible” tokens. Land can also have some value, but each piece is unique, so, it is not fungible. In a similar way, works of art are all unique, and therefore non-fungible (Who would ever take a Dali over an original Picasso?) There from, we get Non-fungible property. So, when you try to buy a piece of virtual property, the particular video clip or artwork is like no others, this is now non-fungible just like the land. So, these compositions are referred to as non-fungible tokens

Most usually, these non-fungible tokens are purchased in exchange for Ethereum or other cryptocurrency. In addition to this unique piece of code (really, that’s what this is) there is another piece of code that marks this as unique. Ok, why would anybody want this unique piece of digital art or music, or something similar? Let’s assume that there is a new metaverse, this one for golf enthusiasts, we’ll call this virtual world, The Club. When you join The Club, you can play golf virtually with friends around the world, enjoy virtual table discussions about golf, anything like that. But, to stand out, you can use virtual currency to buy different clothing for your avatar. There might be a very particular outfit that looks very good (to you) confers upon your avatar uniqueness. So, you use your virtual currency for the outfit, and you are guaranteed that nobody else will have that outfit. This outfit is now the non-fungible token. Perhaps you have a digital house, and you wanted to make the inside unique, and saw artwork you liked. Buy it with virtual currency and showcase that artwork in your “house” without any fear of anybody else having it. This is another example of an NFT.

What Are NFTs Used For?

Blockchain technology is very attractive to artists. First, they are able to safely sell their art without the use of an expensive agent or middleman. Second, if setup correctly, the NFT can continue to earn the artist money when it is resold from one buyer to another. Essentially, this is a perpetual royalty. Art, in NFT format, has made its way into advertising too, and the most famous version of this was Taco Bell. Even the NBA seems to be jumping on this bandwagon, as well as other stars. Snoop Dogg has released several art pieces and other unique items as NFTs.

Why are NFTs important?

NFTs are exciting and potentially important. They are important to artists of all types as they can avoid costly agents and register the work on the blockchain. The buyer can identify their version as the original. But, for the average investor, NFTs represent a highly speculative class of investment that should probably be avoided. Because most of these NFTs are within the Ethereum blockchain, the authors suggest that investment in Ethereum itself might be safer. Dr. Ozair of Rutgers Business school reminds us that, “Whether an asset’s value is in a bubble or not is determined in hindsight.” He brings up the point that in Europe these NFTs are just beginning to be regulated, and the U.S. is likely not far behind.

Even so, non-fungible tokens could be an important technological development. In a new digital era that blurs the lines between the physical and virtual worlds, a new way to track digital asset ownership and distribution online will be increasingly important. These blockchain-based tokens could also disrupt financial intermediaries and lower the cost of buying and selling big-ticket items such as autos and real estate. That doesn’t necessarily mean you should invest in highly speculative NFTs, but, at the very least, their development is worth keeping an eye on. Dr. Lenz of Duke University is particularly high on NFTs. According to him, the potential of NFTs is just having its surface scratched. He goes on to suggest that NFTs are currently in “the inverse of a bubble.”

The middle ground seems to be that you should consider investing if you derive emotional benefits from the NFT, and make it not a purely business decision. Perhaps, if you buy a work of art from some celebrity, you get to meet them or get a personalized autograph. If the perks are good enough for you, it could be well-worth the investment.

This is all really slippery. What’s to keep somebody from reproducing it over and over again and diluting the value of my NFT?

In a word, not much. But there is something about having the original, and with an NFT, you can prove it. For instance, there are millions of copies of the soundtrack to Star Wars. Each one is infinitesimally different from the original master possessed by (probably) George Lucas. The copies all sound great, but they are not the original. This is the power of the NFT. Some people might laugh at this but, some NFTs sell for millions of dollars, and that is no laughing matter.

Who cares?

For me, a car is transportation. Get me from point A to point B reliably, and I am happy. But, some people like to evoke their own style by owning, say, a Corvette. In fact, across the nation, there are many Corvette clubs, and the only entry requirement is to own one of these vehicles. Generally, the men and women in these Corvette clubs are rabid enthusiasts of the brand. Would you be surprised to learn that online, there are enthusiast communities too? The first one was organized around cartoon penguins and the general word for these groups are now called “penguin communities” regardless of what the uniting attribute is. The point is, within these online enthusiast communities, the NFTs can be seen to be very valuable.

Are these NFTs just like the Beanie Babies of the 1990s?

Perhaps. I would suggest however, that they are slightly different because there is an entry on the blockchain to register the original work as belonging to you. Beanie babies (and for that matter tulips in that bubble) were not registered. On the other hand, if the format of the code becomes obsolete or the company that makes that software goes bankrupt, the value of the NFT could plunge FAST!!

NFTs are also generally one of a kind, or at least one of a very limited run, and have unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.

OK, I’m psyched! How do I buy these NFTs?

First there’s no reason to yell. Second, go to Kraken, or Coinbase or other reputable cryptocurrency exchange and get a wallet that can hold cryptocurrency and NFTs. Third, buy a good supply of Ethereum which you will use to purchase the NFT. Fourth, do your research very carefully. Consider some of the larger NFT marketplaces like OpenSea, Rarible or Foundation and investigate the offerings and especially the people behind these NFTs. (Please note that the procedure for verification differ markedly from platform to platform.)

Are there any taxes to consider?

Yes. The artist who is selling the NFT will have income tax to pay. The first buyer will have capital gains tax to pay when they resell the NFT (hopefully at a premium.) Beware, if there are other cryptocurrency transactions associated with this, any gain on that part of the transaction will also be taxed at the capital gains rate.

The Verdict

So, it seems that we should consider the middle group. NFTs are an investment. So, if you do have plans to hold the NFT for a while, this could be an opportunity for you. On the other hand, if you do truly get some additional utility from this investment, and the price is right, you are likely to have some great stories as a kind of dividend. Be sure to understand any tax implications, keep the amounts small, and you might go do well with NFTs.

REFERENCES

https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq

https://www.forbes.com/advisor/investing/cryptocurrency/nft-non-fungible-token/

https://www.fool.com/investing/stock-market/market-sectors/financials/non-fungible-tokens/

https://www.gemini.com/cryptopedia/nft-non-fungible-token-crypto-collectibles

Throwing a Monkey Wrench

May 10, 2022Andrew KolodyUncategorizedcryptocurrency

Headline: What is the Bored Ape Yacht Club, and what does it tell us about NFTs?

Date:

Body: If one is good, then, ape is GREAT!! Today, we are speaking about monkey business, a REAL monkey business. Welcome to the Bored Ape Yacht Club. Why am I speaking to you about this? Am I simply aping what is a very popular current art form? No, these guys are also an example of an N.F.T. club. And, if you think the monkey puns are going to quit, wait for details!! I’ll be swinging for each one!

What is the Bored Ape Yacht Club

It is a website where you can purchase an NFT of an ape, festooned in various styles of dress, doing various things. They can then be used as your online avatar, and by purchasing, you get access to an online club of sorts. This club is part art appreciation society, part social club. (I have to admit, they are pretty cute. Don’t trust me, judge for yourself.)

Laugh all you wish, the creator of the BAYC started out with 10,000 images, and the day after launch, they had all sold. One expert in the crypto field, Matt Galligan said, “It became a status symbol of sorts, kind of like wearing a fancy watch or rare sneakers.” And, this is backed up with numbers; trade within these NFTs has netted people almost $100 Million. Many see this activity in very positive terms. “When everyone’s got skin in the game, it creates a new dynamic, as opposed to everyone being able to say what they want and critique everything without consequence,” Drew Austin, a technology investor who owns three Bored Apes. As you use the ape NFT, it becomes your identity, so, your anonymity is somewhat mitigated. Interestingly, the founders also choose to keep their anonymity and go by the pseudonyms of Gargamel and Goner. Each member of their staff has their own handle. Of course, regardless of their attempts, a BuzzFeed article outed the real names of the 2 creators.

Seeing the popularity of their creation, the Yuga Labs and 2 creators of BAYC have also started the Mutant Ape Yacht Club, using the same systems. Recently, Yuga Labs airdropped a “serum” to owners of Bored Apes. If they have their image “take” this serum, they will now have a mutated Ape. Depending upon the rarity of the mutation, these apes fetch prices that are truly bananas.

Why apes?

According to the founders, when one buys a lot of cryptocurrency, it is called “aping in” (I can only guess that this is a snide reference to getting into cryptocurrency because you didn’t want to miss out.)

Is this the only NFT club?

No, there are others. Pre-dating BAYC were groups like CryptoPunks and Hashmasks. All are alike as they make donations to related charities, have social events and other goodies. (In BAYC, each member gets a dog picture too, from the Bored Ape Kennel Club and a donation to an ape preservation charity is made in their name.) But, BAYC is a little different from these other clubs, in that the buyer gets the individual commercial right to reproduce that image on merchandise and to use it as they see fit. Just recently there was an ICO for “Ape coin” and these were air-dropped to all who had purchased an NFT. Far from a joke, this currency had a $3.7 Billion market cap on a recent close. Far from a sham, I believe that this scheme was hatched because Yuga Labs wanted to have advice from a variety of experts who could help them. Reading a list of people who received a lot of Ape Coin, it seems that they will receive a lot of advice from experienced entrepreneurs and executives.

How does it work?

When one “buys” an ape, one gets a standard ape with a random collection of attributes (controlled by algorithm.) But, certain attributes like laser eyes are programmed to be less common, and these avatars often sell for much higher prices. And, yes, some people buy hundreds at a time and sell them off, hoping to make a profit; It is a thing. Amazingly, there is already a well-publicized number of people with “seller’s regret.” One lady sold a figure for $1,500 just after the launch, and several months later will was seeing offers of at least $12,000 for the same NFT.

What keeps people from copying the image?

It’s pretty easy to block and copy and paste any image on the Internet. To be honest, there’s not much more than a stamp on a blockchain, but per several sources, the Twitter community and other social media communities are pretty serious about self-policing. Yet, one serial entrepreneur in the space said, “It’s taking a gamble on the idea that, in aggregate and over time, the fans might know what’s best for the universe that they care about.” Apparently, they are very willing to take a swing at this, as they purchased 2 of their largest competitors just 2 months ago. Having said this, barely a month ago, the private Discord server for BAYC participants was hacked. We shall see.

There is an interesting thing going on here.

The war between riches and “being cool” is not a new one. In the music scene, very often new artists are seen as “cool” when they have a small cult following and only occasionally make a big splash or 2. When they try to monetize (you know, to pay for fripperies, like food and rent) they are often seen as sell-outs. Visual artists seem to have the same challenge. In the research I have done for this post, this dichotomy is in full effect in this NFT area.

The Verdict

Regarding NFTs, we are at the very beginning of what promises to be a long and twisty road. The main questions seem to revolve around the issue of “how can I ensure that my NFT will retain its value?” A good question. I think we (being a litigious nation) need to iron out the relationship between an entry on a blockchain and a copyright. Some say that a copyright vests, just as soon as an entry is made on a blockchain. Some say that copyright has nothing to do with the information on the blockchain. Doubtless, in the not-too-distant future, there will be a court case or cases that look at exactly this issue. For now, perhaps the best approach is to be cautious. If you see an NFT that you really like, and it appears to be affordable, by all means, go ahead and test the waters. Just don’t go too far underwater.

REFERENCES

https://www.newyorker.com/culture/infinite-scroll/why-bored-ape-avatars-are-taking-over-twitter

https://fortune.com/2022/03/18/what-is-bored-ape-yacht-club-nft-apecoin-explained/

https://www.coindesk.com/learn/whats-the-story-behind-bored-ape-yacht-club-creator-yuga-labs/

https://www.fastcompany.com/90735768/bored-ape-yacht-club-jimmy-mcnelis-king-nft-kingship-future