Did We Buy the Constitution?
No, but it all worked out in the end.
A lot has happened in the three weeks since I wrote about my chance at owning the Constitution. It’s been fun, exciting, disappointing, surprising and frustrating all at the same time. You may have read about the outcome of the auction the week before Thanksgiving, and it honestly could not have been any more ironic or hilarious how it all played out. I’ll take you through a quick recap and my own personal experience and key takeaways from it all.
The Constitution Sells for WAY more than expected
Early expectation for the price of the sale of the Constitution ranged from $15 million to $20 million. I believe the original goal for the Constitution DAO was to raise around $20 million to have a shot at actually winning the auction. They totally outdid themselves (ourselves?) and within only 4-5 days were able to raise over $40 million. The only problem going to a public auction with a publicly displayed bankroll is exactly that, your competition knows exactly what they are up against. The winning bid came up at around $42 million, but unfortunately it wasn’t the Constitution DAO who won it.
Ken Griffin Buys the Constitution
The DAO (I guess I would include myself here) could not have been outbid by anyone more perfect than Ken Griffin. I swear it had to be in retaliation from the Gamestop debacle of last year. If you don’t know who Ken is, or you don’t remember what happened last year, Ken is the billionaire founder / CEO of Citadel which is a massive hedge fund. They were caught up in some of the madness from the meme stocks of last year, specifically how it played out with Gamestop & Robinhood. Citadel was in the middle of it all and my guess is many of those meme stock followers and buyers of Gamestop that caused significant losses for Ken’s Citadel, were also somehow involved in the Constitution DAO group.
Constitution DAO didn’t buy the Constitution - What happened next?
This is where things got interesting for me personally. It wasn’t super complex to participate in contributing to the Constitution DAO, but honestly the world of crypto wallets, NFT’s, DAO’s is still a little new to me so I’m learning how all of this works oftentimes in real time. I read there were two options to get your money back - redeem for Ethereum (which was the original crypto currency the transaction took place on) or you could redeem for a new crypto token - PEOPLE. When I first heard about this immediately after the auction I didn’t pay much attention to it, and frankly I figured it would be somewhat complex to get the tokens back so I took my time going about it. As I listened to last weeks Animal Spirits podcast in the early morning hours working out, they mentioned there was a 30X return if you redeemed using the new crypto currency PEOPLE. I immediately ran upstairs and tried to figure out what I needed to do.
What Happened Next…
I went to the original website where I transferred in my Ethereum to redeem the original shares for PEOPLE. It was super simple to connect to my Coinbase Wallet (this is the wallet I’ve used figuring it was easiest to tie into Coinbase - they are different) and immediately I was redeemed shares of PEOPLE. Thinking the market value of PEOPLE would be the same as the amount I first contributed, I was in total shock when the balance in my wallet was 15 times higher than my original contribution. For something that wasn’t meant to be an investment at all, that was quite the return.
Clearly there was movement on this new digital currency, and as exhilarating as it was to have the 15x return, it was half the value as the day before. Based on that, I decided I would cash out 95% of my holding in PEOPLE and redeem what I could. I kept the other 5% because like the lottery commercials “You Never Know.” Trying to cash out of crypto holdings using the current platforms like Coinbase makes you aware of how frustrating and costly this technology can all be.
Because I have other assets set aside for crypto investing, my goal was to cash out most of the money from the Constitution bid and get it back into my personal checking account. Essentially I needed to convert my PEOPLE token held in my Coinbase Wallet back to cash in my Coinbase (again these are different) account so I could move it to my checking account. So how did this all happen? With a lot more steps and fees than I ever could have imagined.
For all the convenience and so-called technology advances crypto has brought about, the systems & fees are incredibly complex and high. It took me seven or eight steps to redeem for cash and get it back into my checking account. I'm shocked by how much each transaction cost me through this process. When it was all said and done, my "investment" lost roughly 17% by the time I redeemed it for cash (Ethereum gas fees can be quite high). If I wasn't playing with "house money" I would have been a lot more upset with how much it cost just to get my money back. Instead, I'm happy I went through the process and steps to learn as much as I could.
Overall Takeaway
To be clear, the amount I’m talking about through this story was pretty immaterial, so it’s not meant to boast or share some huge return. The bigger takeaway is how seemingly quick wealth was generated (albeit unwittingly), how simple some of the processes were, how complex and clunky it can feel, and how this fiat replacement technology is still stuck in the past and far from being at the point of a useful currency moving forward.
More importantly I want to share how I view all of this from an advisor perspective. Where I see opportunities and how investors & clients can view this asset class moving forward. I'm sure there is a ton of regret and FOMO after seeing how much wealth has been generated in this space, however investors need to be disciplined with how they approach this space in the future.
As I first stated, this experience into the Constitution DAO was never meant to be an investment. It was stated going into the auction that the shares of the Constitution, if won, would not be tradable. I thought it would be a way to participate in this new technology and be part of a “DAO” in a way that was meaningful and interesting to me. The fact that it turned into a rather nice return was totally out of the realm of what I thought was possible. And to be clear - the percent return was nice, the dollar amounts involved were very small.
This does lead me to some thoughts on NFT’s and where I see the future headed there. I think there's a big future in terms of the technology use case of selling art online, instant contracts (through the blockchain), set of defined rules (again blockchain), and ongoing royalties to the original maker which is a neat concept. NFT's, blockchain and Web3 are giving more control to creators in todays online world vs. what we've experienced in the past with the behemoths today like Facebook and Twitter where you essentially give up ownership and control of your content.
From an investment perspective (and personal opinion): when you see how some of these projects have appreciated in price - there’s no doubt that there are major bubbles at play. Like MAJOR. How it plays out? I’m not really sure yet. I believe there will be incredible amounts of wealth destroyed from this. But I also think it will be mostly isolated to individuals who have created insane amounts of wealth in the last few years as early adopters to this area. My biggest fear is for those who are late to join and put a significant amount of their overall net worth into an NFT investment. The way these projects are "valued" is much different than how a typically company or security of the past was valued through cash flow and growth. The current growth story for many of these NFT projects come about from status and community and frankly I don't know how to quite price that in as we move forward.
The big push in the NFT space is the creation of “community.” This is an area I’ve discounted greatly in the past, but now realize is a real thing here. The draw to some of these NFT projects is the creation and membership within the community. Take the Bored Ape Yacht Club example, they just recently had a big gathering in Miami for owners of the NFT’s (there are 10,000 unique images of Ape’s, all similar, yet unique in their own way). From the stats I’ve seen, there are about 6,000 unique owners. The images are scarce, but not that scarce. I personally have a hard time seeing something like this keep a price of close to $200,000 over time, and I wonder how many individuals will be left holding the bag at the end of the day who can’t afford to be left holding the bag. I also question these “exclusive” communities w/ nearly $200,000 buy-ins since this feels more like an exclusive country club initiation rather than an open community which seems to be totally against the intention of many of these web3 communities.
In terms of simplicity, once you get over the hump of jumping into this space (funding a cryptocurrency, opening your own wallet so you can purchase NFT’s, etc) its all rather simple. Most of it is all connected and the ease of linking to these projects is quite amazing. These are some of the “pros” to this space. It also comes with significant cons as well.
One downside is that due to the simplicity of moving money and linking to accounts etc, there is high potential for fraud. For me, when using my wallet and buying/selling NFT’s, I’m using money I would be OK with losing. Meaning its relatively immaterial as it relates to my overall investable assets (this is different from my personal investment in cryptocurrency which I consider separate from the NFT space). Another con is that doing anything in this space comes with high fees. Whether its platform fees (generally 1.5% per transaction), to “gas” fees which are costs to generate a transactions, your overall fees add up FAST. As I shared above, the fees cut my take home by about 17% when it was all said and done. It felt like I was dealing with the stock brokers of yester-year. It also put new meaning to what early adopters say to HODL (Hold On for Dear Life). I don’t know if they do this to ride out the volatility or to avoid the MASSIVE fees!
For me personally, I continue to believe in the future of crypto and NFT market, however I view them in entirely separate ways. NFT’s I would view like trading cards or any other hobby that can be collected and allows for some returns, but not meant to be an investment asset class if you will. I will continue to mess around in the space, but with amounts FAR less than 1% of my investable net worth. I would tell a client the same thing that I said about Bitcoin and crypto four years ago - play in the NFT space with sums of money that you would be comfortable with going to zero. I don’t think every project will do that, but I truly don’t believe the prices that we are seeing today in some of these projects holding up. I don’t know what the breaking point is, but again, I don’t see a digital picture of an ape (nor the community that comes with it) staying at an entry price of nearly $200,000.
Established cryptocurrency on the other hand I do think is a reasonable asset class to invest in, albeit an entirely volatile one. Where I used to think investing in crypto was with money that could go to zero, I no longer feel the same way. It’s gotten too big for that to happen at this point. It should be noted though the future volatility could be significant. Last Friday night Bitcoin fell 17% overnight. It was down close to 40% from its highs last month. This is an asset class with significant volatility, but one that also has a definitive technological use case moving forward. For that reason, I see no reason why you couldn’t build a well diversified portfolio with 2-3% of your overall allocation invested in the space. I’ve personally done this with my own accounts. I believe in the long-term use case for it, and think it’s worth having money invested in a responsible manner.
I’m currently working with outside providers that will allow me to manage clients crypto assets for them. For those less willing to own directly, the new Bitcoin ETF, along with many others, will give the average investor tons of ways for exposure. There are risks with the ETF vs. holding direct (mainly future spot price issues - in the last month or so since launching the bitcoin ETF is lagging Bitcoin by about 2.5% due these issues). Even with the spread concerns, its a simple way to gain relative exposure.
The last point I’ll make is that in my experience, different elements and areas of this space are going to cater to different investors - and that’s ok. My goal as an advisor is to gain the capabilities to help lead a strategy of diversification and direct ownership for clients. I'm currently working with OnRamp to gain access for clients in this space. For some mom and pop investors doing it on their own, there is nothing wrong with holding a Bitcoin ETF like BITO. It won’t be an exact exposure to Bitcoin, but it should be fairly close. Hopefully as time goes on the platforms will become a little more mainstream, costs for transactions should come down (this is the currency of the future right!!). It’s also going to be hard to keep up with it all. There is so much to learn and there are constantly new digital currencies showing up, new technology being deployed and probably many more scams to come along. Above all else, be careful and HAVE A PLAN. I’m very intentional with how I go about what I’m investing in and what I’m playing in. And my investments are meant to be diversified and knowing I can live with the volatility that undoubtedly lies ahead.
Some of my Favorite Resources on these Topics
Podcast explaining concept behind Bored Ape Yacht Club - Web3 Breakdowns
https://www.joincolossus.com/episodes/99935896/golden-bored-ape-yacht-club?tab=blocks
Colossus - https://www.joincolossus.com/
I recommend filtering in the "Invest Like the Best" podcast section to search for crypto topics
You can also listen to the Web3 Breakdowns
Bankless - Podcast About Crypto in general
Not Boring - Weekly newsletter generally covering web3 tech
Chris Dixon - investor & GP at Andreesen Horowitz
Google search podcasts, his twitter account, blogs by him. He has a good overall feel and perspective on this space and I've learned a lot listening and reading his work