tag:theconversation.com,2011:/fr/topics/nasdaq-8187/articlesNASDAQ – The Conversation2024-02-15T13:35:12Ztag:theconversation.com,2011:article/2232742024-02-15T13:35:12Z2024-02-15T13:35:12ZStock indexes are breaking records and crossing milestones – making many investors feel wealthier<figure><img src="https://images.theconversation.com/files/575391/original/file-20240213-30-trav60.jpg?ixlib=rb-1.1.0&rect=0%2C120%2C5751%2C3362&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Major stock indexes were hitting or nearing records in February 2024, as they were in early 2020 when this TV chyron appeared. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FinancialMarketsWallStreet/1d60b3c58f8149a6bf9f1c9b48dfb189/photo?Query=S&P%20500=&mediaType=photo&sortBy=&dateRange=Anytime&totalCount=9&digitizationType=Digitized&currentItemNo=1&vs=true">AP Photo/Richard Drew</a></span></figcaption></figure><p><em>The S&P 500 stock index topped 5,000 for the first time on Feb. 9, 2024, exciting some investors and garnering a flurry of <a href="https://www.cnbc.com/2024/02/09/what-the-sp-500-at-5000-means-for-your-money.html">media coverage</a>. The Conversation asked <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">Alexander Kurov</a>, a financial markets scholar, to explain what stock indexes are and to say whether this kind of milestone is a big deal or not.</em> </p>
<h2>What are stock indexes?</h2>
<p><a href="https://www.investopedia.com/terms/i/index.asp">Stock indexes</a> measure the performance of a group of stocks. When prices rise or fall overall for the shares of those companies, so do stock indexes. The number of stocks in those baskets varies, as does the system for how this mix of shares gets updated.</p>
<p>The <a href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average</a>, also known as the Dow, includes shares in the 30 U.S. companies with the largest <a href="https://www.investopedia.com/terms/c/capitalization.asp">market capitalization</a> – meaning the total value of all the stock belonging to shareholders. That <a href="https://www.cnbc.com/dow-30/">list currently spans companies from Apple</a> to Walt Disney Co.</p>
<p>The <a href="https://corporatefinanceinstitute.com/resources/equities/sp-500-index/">S&P 500</a> tracks shares in 500 of the <a href="https://www.investopedia.com/terms/p/publiccompany.asp">largest U.S. publicly traded</a> companies.</p>
<p>The <a href="https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp">Nasdaq composite</a> tracks performance of more than 2,500 stocks listed on the <a href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq stock exchange</a>.</p>
<p>The DJIA, <a href="https://guides.loc.gov/this-month-in-business-history/may/djia-first-published">launched on May 26, 1896</a>, is the oldest of these three popular indexes, and it was one of the first established.</p>
<p>Two enterprising journalists, Charles H. Dow and Edward Jones, had created a different index tied to the railroad industry a dozen years earlier. Most of the 12 stocks the DJIA originally included wouldn’t ring many bells today, such as Chicago Gas and National Lead. But one company that only got booted in 2018 had <a href="https://www.investopedia.com/ask/answers/100214/who-were-original-dow-jones-industrial-average-djia-companies.asp">stayed on the list for 120 years</a>: General Electric.</p>
<p>The S&P 500 index was introduced in 1957 because many investors wanted an option that was more representative of the overall U.S. stock market. The <a href="https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp">Nasdaq composite</a> was launched in 1971. </p>
<p>You can <a href="https://www.investopedia.com/terms/i/indexfund.asp">buy shares in an index fund</a> that mirrors a particular index. This approach can diversify your investments and make them less prone to big losses.</p>
<p>Index funds, which have only existed since Vanguard Group founder <a href="https://www.investopedia.com/terms/j/john_bogle.asp">John Bogle launched the first one in 1976</a>, now <a href="https://www.cnbc.com/2024/01/18/passive-investing-rules-wall-street-now-topping-actively-managed-assets-in-stock-bond-and-other-funds.html">hold trillions of dollars </a>.</p>
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<h2>Why are there so many?</h2>
<p>There are <a href="https://www.investing.com/indices/world-indices">hundreds of stock indexes</a> in the world, but only about <a href="https://www.investing.com/indices/major-indices">50 major ones</a>.</p>
<p>Most of them, including the Nasdaq composite and the S&P 500, are value-weighted. That means stocks with larger market values account for a larger share of the index’s performance.</p>
<p>In addition to these <a href="https://www.investopedia.com/terms/b/broad-basedindex.asp">broad-based indexes</a>, there are many less prominent ones. Many of those <a href="https://www.spglobal.com/spdji/en/index-family/equity/us-equity/sp-sectors/#overview">emphasize a niche</a> by tracking stocks of companies in specific industries like energy or finance.</p>
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<h2>Do these milestones matter?</h2>
<p>Stock prices move constantly in response to corporate, economic and political news, as well as changes in investor psychology. Because company profits will typically grow gradually over time, the market usually fluctuates in the short term, while increasing in value over the long term.</p>
<p>The DJIA first <a href="https://www.spglobal.com/spdji/en/landing/topic/djia-125-milestones/">reached 1,000 in November 1972</a>, and it crossed the 10,000 mark on March 29, 1999. On Jan. 22, 2024, it surpassed 38,000 for the first time. Investors and the media will treat the new record set when it gets to another round number – 40,000 – as a milestone. </p>
<p>The S&P 500 index had never hit 5,000 before. But it had already been breaking records for several weeks.</p>
<p>Because there’s a lot of randomness in financial markets, the significance of round-number milestones is mostly psychological. There is no evidence they portend any further gains.</p>
<p>For example, the Nasdaq composite <a href="https://www.nasdaq.com/articles/nasdaq-composite-hits-5000-2015-03-03">first hit 5,000 on March 10, 2000</a>, at the end of the <a href="https://www.investopedia.com/terms/d/dotcom-bubble.asp">dot-com bubble</a>.</p>
<p>The index then plunged by almost 80% by October 2002. It took 15 years – <a href="https://www.cnbc.com/2015/03/02/us-stocks-open-narrowly-mixed-ahead-of-data.html">until March 3, 2015</a> – for it return to 5,000.</p>
<p>By mid-February 2024, the Nasdaq composite was <a href="https://finance.yahoo.com/quote/%5EIXIC?p=%255EIXIC">nearing its prior record high of 16,057</a> <a href="https://www.nasdaq.com/market-activity/statistical-milestones">set on Nov. 19, 2021</a>.</p>
<p>Index milestones matter to the extent they pique investors’ attention and <a href="https://www.investopedia.com/terms/m/marketsentiment.asp">boost market sentiment</a>.</p>
<p>Investors afflicted with a <a href="https://www.investopedia.com/how-fear-of-missing-out-will-push-bull-market-to-new-records-4682566">fear of missing out</a> may then invest more in stocks, pushing stock prices to new highs. Chasing after stock trends may destabilize markets by <a href="https://theconversation.com/wall-street-isnt-just-a-casino-where-traders-can-bet-on-gamestop-and-other-stocks-its-essential-to-keeping-capitalism-from-crashing-154154">moving prices away from their underlying values</a>.</p>
<p>When a stock index passes a new milestone, investors become more aware of their growing portfolios. Feeling richer can lead them to spend more. </p>
<p>This is called the <a href="https://www.investopedia.com/terms/w/wealtheffect.asp">wealth effect</a>. Many economists believe that the consumption boost that arises in response to a buoyant stock market can make the economy stronger.</p>
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<h2>Is there a best stock index to follow?</h2>
<p>Not really. They all measure somewhat different things and <a href="https://www.cnbc.com/2023/07/21/difference-between-the-sp-the-dow-and-the-nasdaq.html">have their own quirks</a>.</p>
<p>For example, the S&P 500 tracks many different industries. However, because it is value-weighted, it’s heavily influenced by only seven stocks with very large market values.</p>
<p>Known as the “<a href="https://www.investopedia.com/magnificent-seven-stocks-8402262">Magnificent Seven</a>,” shares in Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla now account for <a href="https://www.blackrock.com/us/individual/investment-ideas/what-is-factor-investing/factor-commentary/andrews-angle/factors-and-magnificent-seven">over one-fourth</a> of the S&P 500’s value. Nearly all are in the tech sector, and they played a big role in pushing the S&P across the 5,000 mark.</p>
<p>This <a href="https://www.nasdaq.com/glossary/n/narrow-based">makes the index more concentrated</a> on a single sector than it appears.</p>
<p>But if you check out several stock indexes rather than just one, you’ll get a good sense of how the market is doing. If they’re all rising quickly or breaking records, that’s a clear sign that the market as a whole is gaining.</p>
<p>Sometimes the smartest thing is to not pay too much attention to any of them.</p>
<p>For example, after hitting <a href="https://www.cnbc.com/2020/02/19/stock-market-wall-street-in-focus-amid-coronavirus-outbreak.html">record highs on Feb. 19, 2020</a>, the <a href="https://www.thestreet.com/dictionary/covid-19-stock-market-crash-of-2020">S&P 500 plunged by 34%</a> in just 23 trading days due to concerns about what COVID-19 would do to the economy. But the market rebounded, with stock indexes hitting new milestones and notching new highs by the end of that year.</p>
<p>Panicking in response to short-term market swings would have made investors more likely to sell off their investments in too big a hurry – a move they might have later regretted. This is why I believe advice from the immensely successful investor and <a href="https://www.cnbc.com/2023/04/21/how-much-youd-have-if-you-invested-in-the-s-and-p-500-a-decade-ago.html">fan of stock index funds</a> Warren Buffett is worth heeding.</p>
<p>Buffett, whose <a href="https://www.investopedia.com/articles/investing/012715/5-richest-people-world.asp">stock-selecting prowess has made him one of the world’s 10 richest people</a>, likes to say “<a href="https://www.cnbc.com/2016/03/04/warren-buffett-buy-hold-and-dont-watch-too-closely.html">Don’t watch the market closely</a>.”</p>
<p>If you’re reading this because stock prices are falling and you’re wondering if you should be worried about that, consider <a href="https://www.cnbc.com/2018/12/17/warren-buffett-says-read-this-poem-when-the-market-is-tanking.html">something else Buffett has said</a>: “The light can at any time go from green to red without pausing at yellow.”</p>
<p>And the opposite is true as well.</p><img src="https://counter.theconversation.com/content/223274/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The S&P 500 topped 5,000 on Feb. 9, 2024, for the first time. The Dow Jones Industrial Average will probably hit a new big round number soon too.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1986822023-01-27T17:04:19Z2023-01-27T17:04:19ZBitcoin has shot up 50% since the new year, but here’s why new lows are probably still ahead<figure><img src="https://images.theconversation.com/files/506823/original/file-20230127-16-4cgk1e.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Up, up and ...</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/golden-bitcoin-digital-currency-futuristic-money-1653739108">CKA</a></span></figcaption></figure><p>To the delight of investors across the cryptosphere, the price of bitcoin (BTC) has rallied over 53% since its low of US$15,476 (£12,519) in November. Now trading around US$23,000, there’s much talk that the bottom has finally been reached for the leading cryptocurrency after a year of painful decline – in November 2021, the price peaked at almost US$70,000. </p>
<p>If so, it’s not only good news for bitcoin but the whole market in cryptocurrencies, since the others broadly move in line with the leader. So is crypto back in business?</p>
<h2>Dotcom lessons</h2>
<p>The past is littered with various periods of market turmoil, from the global financial crisis of 2007-09 to the COVID-19 collapse in 2020. But neither of these is a particularly good comparison for our purposes because they both saw sharp drops and recoveries, as opposed to the slow unwinding of bitcoin. A better comparison would be the dotcom bubble burst in 2000-02, which you can see in the chart below (the Nasdaq is the index that tracks all tech stocks). </p>
<p><strong>Nasdaq 100 index 1995-2005</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Look at the bitcoin chart since it peaked in November 2021 and the price action looks fairly similar: </p>
<p><strong>Bitcoin bear market price chart 2021-23</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Both charts show that bear markets go through various periods where prices rise but don’t reach the same level as the previous peak – known as “lower highs”. If bitcoin is following a similar trajectory to the early 2000s Nasdaq, it would make sense that the current price will be another lower high and that it will be followed by another lower low. </p>
<p>This is partly because like the 2000s Nasdaq, bitcoin seems to be following a pattern known as an <a href="https://www.investopedia.com/terms/e/elliottwavetheory.asp#:%7E:text=The%20Elliott%20Wave%20theory%20is%20a%20form%20of%20technical%20analysis,that%20oppose%20the%20larger%20trend.">Elliott Wave</a>. Named after the renowned American stock market analyst Ralph Nelson Elliott, this essentially argues that during a bear phase, investors shift between different emotional states of disappointment and hope, before they finally despair and decide the market will never turn in their favour. This is a final wave of heavy selling known as capitulation. </p>
<p>You can see this idea on the chart below, where bitcoin is the green and red line and Z is the potential capitulation point at around US$13,000 (click on the chart to make it bigger). The black line is the path that the Nasdaq took in the early 2000s. The blue pointing finger above that line is potentially the equivalent place to where the bitcoin price is now. </p>
<p><strong>Bitcoin now vs Nasdaq in the early 2000s</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=358&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=358&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=358&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Author provided</span></span>
</figcaption>
</figure>
<p>The one other thing to note on the chart is the wavy line that’s moving horizontally along the bottom. This is the <a href="https://www.investopedia.com/terms/r/rsi.asp">stochRSI or stochastic relative strength index</a>, which is an indication of when the asset looks overbought (when the line is peaking) or oversold (when it’s bottoming).</p>
<p>A sign of a coming shift is when the stochRSI moves in the opposite direction to where the price is heading: so now the stochRSI is coming down but the price has held up around US$23,000. This too suggests a fall could be imminent. </p>
<h2>The game of wealth transfer</h2>
<p>Within markets, there is often a game that investors from institutions such as banks and hedge funds play with amateur (retail) investors. The aim is to transfer retail investors’ wealth to these institutions. </p>
<p>This is particularly easy in an unregulated market like bitcoin, because it is easier for institutions to manipulate prices. They can also talk up (or talk down) prices to stir up retail investors’ emotions, and get them to buy at the top and sell at the bottom. This “traps” the irrational investors who buy at higher prices, transferring wealth by giving the institutions an opportunity to convert their holdings into cash. </p>
<p>It therefore makes sense to compare how the retail and institutional investors have been behaving lately. The following charts compare those crypto wallet addresses that hold 1 BTC or more (mostly retail investors) with those holding upwards of 1,000 BTC (institutional investors). In all three charts, the black line is the bitcoin price and the orange line is the number of wallets in that category. </p>
<p><strong>Retail investor behaviour</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=346&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=346&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=346&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p><strong>Institutional investor behaviour pt 1</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=277&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=277&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=277&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=349&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=349&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=349&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows all wallets that hold at least 1,000 BTC.</span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p><strong>Institutional investor behaviour pt 2</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=282&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=282&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=282&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=354&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=354&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=354&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows all wallets that hold at least 10,000 BTC.</span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p>This shows that since the <a href="https://theconversation.com/i-thought-crypto-exchanges-were-safe-the-lesson-in-ftxs-collapse-195800">FTX scandal</a> back in November, which led to the world’s second-largest crypto exchange collapse, retail investors have been buying bitcoin aggressively, resulting in the highest number of addresses holding at least one BTC ever. On the other hand, the biggest institutional investors have been offloading. This suggests that the institutional investors agree with our analysis. </p>
<h2>Where we’re heading</h2>
<p>There are those who argue that bitcoin is a bubble and that ultimately cryptocurrencies are worthless. That’s a separate debate for another day. If we assume there is a future for blockchains, which are the online ledgers that enable cryptocurrencies, the key question is when bitcoin will reach the accumulation phase that typically ends a bear phase in any market.</p>
<p>Known as <a href="https://www.investopedia.com/articles/active-trading/070715/making-money-wyckoff-way.asp">Wyckoff accumulation</a>, this <a href="https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method">is where</a> the price of the asset repeatedly tests two areas: the upper bound where traders previously sold heavily enough for the price to stop rising (known as resistance), and the lower bound where traders bought heavily enough that the price stopped going down (known as support). </p>
<p>At the point where institutional investors decide the lower bound has proved to be sufficiently resilient – in other words, they think the price is cheap at that level – they will start buying the asset again. That moment is only likely to come after there has been a capitulation. </p>
<p>Of course, history does not repeat itself exactly. It may be this is the first time that retail investors have outsmarted the large institutions, and that the only way is now up. </p>
<p>More likely, however, there is more pain on the way. With a recession on the cards, unprecedented job layoffs and weak retail data coming out of the US, it doesn’t point to the kind of optimism that tends to move markets higher. It would therefore make sense to brace yourself for another plunge in the price of bitcoin and the rest of the crypto market.</p><img src="https://counter.theconversation.com/content/198682/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Kinsella works part-time as an investment analyst for Tyndall Asset Management.</span></em></p><p class="fine-print"><em><span>Richard Fairchild does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There’s much excitement among bitcoiners right now – but are they about to be disappointed?James Kinsella, PhD Researcher in Finance, University of BathRichard Fairchild, Senior Lecturer in Corporate Finance, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1920392022-10-07T12:32:30Z2022-10-07T12:32:30ZElon Musk’s revived US$44 billion Twitter bid is another twist in this tale, but it may not be the last<p>With only about two weeks to go before a <a href="https://www.reuters.com/markets/deals/elon-musk-twitter-have-yet-reach-deal-end-litigation-sources-2022-10-05/">court case</a> over his attempts to withdraw his US$44 billion (£39 billion) offer to buy Twitter, Elon Musk’s second <a href="https://time.com/6219520/elon-musk-twitter/">U-turn</a> over the deal shows the world’s richest man is still full of surprises.</p>
<p>His latest decision to resurrect the offer to acquire the social media platform for US$54.20 per share is not a huge shock – <a href="https://fortune.com/2022/10/03/elon-musk-lose-twitter-case-delaware-what-happens-if-he-refuses-to-pay/">speculation</a> that he would lose the case was rife. But it is surprising that he has decided to reinstate his original price offered last April, rather than attempting to negotiate a lower figure.</p>
<p>If this is another stalling tactic to drive up costs and delay any resolution, reviving shareholder hopes for the acquisition could certainly put pressure on the Twitter board to settle for less just to get the deal done. The more likely reason for this apparent capitulation, however, is that Musk was <a href="https://www.wired.com/story/why-elon-musk-wouldnt-face-twitter-in-court/">losing faith</a> in gaining a favourable result from the court case. </p>
<p>A US court has now <a href="https://www.theguardian.com/technology/2022/oct/06/elon-musk-twitter-litigation-takeover">postponed the planned court proceedings</a> to give Musk time to gather the necessary funds to buy Twitter. But the unpredictable Musk may still have a few moves left to play. As such, it’s still unclear how, when – or even if – the deal will finally complete.</p>
<p>Certainly, nothing seems to be straightforward with Musk. Even at the time he made the initial bid, US$44 billion was a huge figure for a company that, throughout its 16-year history, has been <a href="https://www.barrons.com/news/can-twitter-become-more-profitable-under-elon-musk-01650998108">unable to consistently turn a profit</a>, even with its large user base. The Twitter board almost immediately <a href="https://www.cnbc.com/2022/04/25/twitter-accepts-elon-musks-buyout-deal.html">accepted the bid</a> when it was made last April, probably for this very reason. </p>
<h2>Twists and turns</h2>
<p>From then on, this tale has been full of twists. First of all, Musk discovered that even the world’s richest person will find it hard to scrape together US$44 billion. Most of Musk’s money is tied up in Tesla shares and selling some of that might have collapsed its share price – although he <a href="https://www.barrons.com/articles/tesla-stock-price-elon-musk-twitter-deal-51664919432">resorted to this tactic</a> eventually. In reality, he has had to <a href="https://www.theguardian.com/technology/2022/may/07/elon-musks-takeover-financing-deal-could-clip-twitters-wings">borrow from a variety of sources</a> using Tesla shares as security, and at very high cost.</p>
<p>Another surprise since the deal was made has been the collapse in the value of technology shares. The main index for tech stocks, NASDAQ, has <a href="https://www.nasdaq.com/articles/down-31-is-it-safe-to-invest-in-the-nasdaq-right-now">fallen by 31%</a> over the past year, with a <a href="https://www.cnbc.com/2022/05/24/tech-stock-rout-or-temporary-blip-top-ceos-weigh-in-on-whats-next-for-markets.html">particularly bad rout</a> in the months after Musk’s bid for Twitter. </p>
<p>Some viewed the sector as <a href="https://www.investopedia.com/ask/answers/120114/how-does-twitter-twtr-make-money.asp">overvalued</a> anyway. High inflation and interest rate rises have increased costs for tech companies, while also reducing demand for their products and services. Lower demand means lower advertising revenue, which is Twitter’s <a href="https://www.investopedia.com/ask/answers/120114/how-does-twitter-twtr-make-money.asp">main source of funding</a>.</p>
<figure class="align-center ">
<img alt="Twitter logo on modern building" src="https://images.theconversation.com/files/488586/original/file-20221006-12-3ly4qx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/488586/original/file-20221006-12-3ly4qx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488586/original/file-20221006-12-3ly4qx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488586/original/file-20221006-12-3ly4qx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488586/original/file-20221006-12-3ly4qx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488586/original/file-20221006-12-3ly4qx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488586/original/file-20221006-12-3ly4qx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Twitter HQ campus in downtown San Francisco, California.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/twitter-hq-campus-downtown-san-francisco-1633645498">Michael Vi / Shutterstock</a></span>
</figcaption>
</figure>
<p>Since the deal was made, Twitter’s stock market valuation has fallen to US$32 billion, and even that is buoyed by hopes of achieving a positive settlement with Musk. The legal action the Twitter board took was designed to either force implementation of the sale or recoup the shareholders’ loss of the US$12 billion difference between the promised sale price and current valuation. </p>
<p>This is not huge money to Musk, but he was willing to fight the deal through the courts and appeal system. While litigation can be about pride rather than money, in the case of Twitter shareholders this is more likely to be about money: selling Twitter at US$44 billion would be a major coup in the current economic environment.</p>
<p>This is almost certainly why the Twitter board has pushed so hard to force the deal through, even though it could result in its members being fired and replaced by a team chosen by Musk – or at least taking a significant pay cut.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1516056299376623626"}"></div></p>
<p>In the vast majority of <a href="https://www.sciencedirect.com/science/article/abs/pii/S0007681304000655">hostile takeovers</a>, the target produces higher profit forecasts and offers increased dividend payments to shareholders in an attempt to persuade them to reject the deal and stick with the existing management. At the very least, a credible defence forces the price to be paid higher so that shareholders benefit. In this case, the original deal was so good the board jumped on it, even as Musk clearly started to reconsider.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1525049369552048129"}"></div></p>
<p>Indeed, while shareholder value is obvious, it’s much harder to work out how this deal will benefit Musk. This is mostly because it’s unclear how he could turn Twitter around. When announcing the resumption of the deal, he spoke about turning it into a “<a href="https://www.axios.com/2022/10/06/musk-super-everything-app-vision-twitter-wechat">super app</a>”. Such a platform would allow users to undertake a variety of activities, such as making payments, messaging and other activities. </p>
<p>This would require users to trust Twitter with their data, however. Users’ concerns about how information is used makes handing a lot of data to another app less appealing <a href="https://www.internetsociety.org/resources/doc/2019/trust-opportunity-exploring-consumer-attitudes-to-iot/">for many people</a>. </p>
<p>The other issue is that there are lots of apps that already do these jobs well, including PayPal, Facebook Messenger, WhatsApp and Apple Pay. Twitter would be a late entrant to these already consolidated markets. </p>
<p>Similarly, Musk’s previous idea to apply a subscription model to Twitter also seems less than convincing. Consumers have been <a href="https://business.yougov.com/content/42972-consumers-cancelling-subscriptions-twice-fast">cancelling all sorts of subscriptions</a> in the face of high price inflation this year.</p>
<p>Instead, Musk may have to cut costs to try to improve Twitter’s performance in the current economic environment. This would mean employees would suffer and Musk and his consortium of lenders could still lose money unless they really do have a plan to turn around the social media platform’s fortunes.</p>
<p>The outlook for the deal has brightened with the latest news of its revival. But most deals fall through because the parties involved <a href="https://businesschief.eu/corporate-finance/why-do-90-mergers-and-acquisitions-fail">fall out</a> during the negotiations and we’ve already seen one falling out between the main parties. Indeed a deal is never done until the final document is signed and the money is paid. That is perhaps the lesson from this saga for anyone selling a business.</p><img src="https://counter.theconversation.com/content/192039/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The economic picture has changed but Musk is pushing ahead with a deal, for now.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1775062022-02-21T15:24:12Z2022-02-21T15:24:12ZStock markets have been a one-way bet for many years thanks to the ‘Fed put’ – but those days are over<p>The prospect of a Russian invasion of Ukraine have sent the markets into a tailspin, compounding fears around inflation that have been building over the past few months. The S&P 500 is trading at 10% below its recent all-time high, while the Nasdaq is down by over 16%. </p>
<hr>
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<p><em>You can listen to more articles from The Conversation, narrated by Noa, <a href="https://theconversation.com/uk/topics/audio-narrated-99682">here</a>.</em></p>
<hr>
<p>The markets have been inflated for years by very easy monetary conditions in which interest rates have been ultra-low and central banks have been “printing money” in the form of <a href="https://www.bankofengland.co.uk/monetary-policy/quantitative-easing">quantitative easing</a> (QE). But one additional factor that has encouraged investors to put so much money into the markets is the so-called “<a href="https://faculty.haas.berkeley.edu/vissing/cieslak_vissingjorgensen.pdf">Fed put</a>”. This is the idea that the US Federal Reserve (and other central banks) will not allow the markets to fall beyond a certain threshold – say 20% to 25% – before riding to the rescue with lower rates and more QE. </p>
<p>Such is the debt in the global financial system, goes the logic, that the markets cannot be allowed to fall any further. A bigger drop could set off a chain reaction of bad debts that could destabilise the biggest banks and cause a crisis that would make 2008 look mild. </p>
<p>Known as <a href="https://www.investopedia.com/options-basics-tutorial-4583012#:%7E:text=Call%20and%20Put%20Options,-Options%20are%20a&text=If%20you%20buy%20an%20options,right%20to%20sell%20a%20stock.">a “put”</a> in reference to a financial instrument that options traders buy to protect themselves from a fall in the markets, the argument is that markets are effectively a one-way bet. Certainly, the S&P 500 has risen sixfold since 2009 and the Nasdaq 12-fold as central banks have eased monetary conditions repeatedly. Even the under-performing FTSE 100 is up by two-thirds over the same period. </p>
<p>We would argue, however, that the Fed put no longer exists. Let us explain why. </p>
<h2>The put in action</h2>
<p>The idea emerged when <a href="https://www.federalreservehistory.org/people/alan-greenspan">Alan Greenspan</a> was chair of the Federal Reserve. Starting with the Black Monday crash of autumn 1987, Greenspan became known for cutting the federal funds interest rate to improve investor sentiment when markets dropped significantly. This was a big shift from the Fed’s previously very slow and cautious approach to changes in the business environment. </p>
<p>When Greenspan cut aggressively after the dotcom crash in the early 2000s, it helped to inflate the US subprime housing bubble that precipitated the 2007-09 crisis. During that crisis, the <a href="https://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm">Fed’s response</a> – now under Ben Bernanke – was again to cut rates and also to increase the money supply through QE. This extra money encouraged financial institutions to lend to businesses and consumers to haul the wider economy out of recession, and <a href="https://www.brookings.edu/wp-content/uploads/2016/06/11_origins_crisis_baily_litan.pdf">lend more</a> to traders so that they could plough it into the markets. </p>
<p><strong>Federal Funds rate 1972 to present</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Federal Funds rate over time" src="https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=260&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=260&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=260&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=327&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=327&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447501/original/file-20220221-14-ywm2k0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=327&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/united-states/interest-rate">Trading Economics</a></span>
</figcaption>
</figure>
<p>The effect of this QE was to expand the <a href="https://www.bankrate.com/banking/federal-reserve/federal-reserve-balance-sheet/">Fed’s balance sheet</a> (in other words, its assets and liabilities) after years of being flat at around US$1 trillion (£733 trillion) to a peak of <a href="https://www.brookings.edu/blog/up-front/2019/05/17/the-feds-bigger-balance-sheet-in-an-era-of-ample-reserves/">US$4.5 trillion</a> in 2014. The Fed then <a href="https://www.ecb.europa.eu/pub/conferences/ecbforum/shared/pdf/2014/ferguson_paper.pdf">very slowly</a> began unwinding these holdings and raising the Fed funds rate from 0.25% to 2.5%, but after a sharp 20% fall in the S&P 500 in late 2018 (and also a drop in government bond prices), it started cutting rates again. </p>
<p>The Fed did continue unwinding QE in the first half of 2019, getting its balance sheet below US$4 trillion. But it went into reverse later in the year after a spike in the crucial <a href="https://ig.ft.com/repo-rate/">“repo” rate</a> at which banks lend funds to one another overnight, which prompted concerns about the prospect of another 2008-style panic. </p>
<p>In March 2020 as the global economy shut down in the face of the <a href="https://www.nytimes.com/2021/02/26/opinion/sunday/coronavirus-alive-dead.html">COVID pandemic</a>, the Fed then swung into full rescue mode. It announced the most aggressive QE programme to date to support the economy, and the balance sheet ballooned to nearly <a href="https://www.ft.com/content/9af75cb4-9743-41af-896f-f25d7588d323">US$9 trillion</a> by late 2021. </p>
<p><strong>Federal Reserve balance sheet</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Fed balance sheet over time" src="https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=456&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=456&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447500/original/file-20220221-26-24vjj6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=456&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.statista.com/statistics/1121448/fed-balance-sheet-timeline/">Statista</a></span>
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</figure>
<p><a href="https://www.gla.ac.uk/media/Media_219105_smxx.pdf">The result</a> of all this easing has been a huge surge in asset prices – not only stocks and bonds but also property. Though <a href="https://www.marketplace.org/2021/03/03/did-the-federal-reserve-make-economic-inequality-worse/">it’s difficult</a> to estimate the effect, the wealthiest 10% in the US now own over 60% of assets, while the poorest 50% own less than 6%. </p>
<h2>The situation now</h2>
<p>The recent falls in stock markets (and bond markets) are taking place while the US economy is performing well. It grew by nearly <a href="https://www.ft.com/content/d44294d5-879d-4013-a79e-82f117b805c5">6% in 2021</a> despite the pandemic. The labour market is robust and <a href="https://www.vox.com/2019/3/18/18270916/labor-shortage-workers-us">lower-skilled workers</a> are finding new opportunities with higher wages. </p>
<p>Yet <a href="https://www.conference-board.org/topics/consumer-confidence">consumer confidence</a> is low, which is partly <a href="https://www.bls.gov/cpi/">due to inflation</a>. Consumer prices in the US rose by a <a href="https://www.bls.gov/opub/ted/2022/consumer-prices-up-7-5-percent-over-year-ended-january-2022.htm">staggering 7.5%</a> over the 12 months to January 2022, the largest since the early 1980s, while the situation has been <a href="https://www.theguardian.com/business/2022/feb/16/uk-inflation-rises-amid-cost-of-living-crisis">similar elsewhere</a>, including in the UK. </p>
<p>The big fear is that workers begin demanding equivalent pay rises in response. This could cause a <a href="https://www.economist.com/leaders/workers-have-the-most-to-lose-from-a-wage-price-spiral/21807722">wage-price spiral</a> in which producers further raise their prices to pay for higher wages, sparking further wage demands and so on – essentially making inflation a <a href="https://theconversation.com/inflation-why-it-is-the-biggest-test-yet-for-central-bank-independence-173676">longer-term problem</a>. </p>
<p>The Fed is tightening monetary conditions to try and get inflation under control: paring back QE to end in March with a view to beginning to reduce the balance sheet later in the year, and signalling that <a href="https://www.forbes.com/sites/jonathanponciano/2022/02/16/stocks-keep-struggling-after-fed-minutes-signal-march-interest-rate-hike-still-on-track/">the federal funds rate</a> will start going up from its current 0.25% in March. </p>
<p>When central banks tighten in this way, it tends to cause economic slowdowns <a href="https://www.wsj.com/articles/behind-the-feds-slow-pivot-to-tackling-inflation-11644930180">and recessions</a>. Together with the prospect of less QE money available for traders, this helps to explain why the markets have been going down. The question is what happens if the markets fall much further: will the Fed and other central banks keep tightening or go into reverse? </p>
<p>There’s a big variation <a href="https://www.bloomberg.com/news/articles/2022-01-29/goldman-sachs-predicts-fed-will-raise-rates-five-times-this-year">in expectations</a> about interest rates, which indicates that nobody is sure. In our view, the Fed and other central banks are likely to tighten fairly aggressively – in line with what the current Fed chair, Jay Powell, <a href="https://www.ft.com/content/c556a131-951d-4283-9e10-36becf77579f">has been signalling</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Lots of cartoon men and a compass with financial crisis on it" src="https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=420&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=420&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=420&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=528&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=528&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447541/original/file-20220221-16-srsh64.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=528&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Investors should not be resting easily.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/financial-crisis-words-on-pocket-watch-553762525">Light and Dark Studio</a></span>
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</figure>
<p>This time is likely to be different for several reasons. Inflation has never before been an issue during the era of the Fed put. It risks seriously damaging the Fed’s credibility, not to mention impoverishing ordinary people with potentially grave political consequences. </p>
<p>The financial system is also very different to in 2008. Whereas part of the problem during the global financial crisis was banks with too little capital to protect themselves, the system is <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fblogs.worldbank.org%2Fallaboutfinance%2Fbank-regulation-and-supervision-decade-after-global-financial-crisis&data=04%7C01%7Ce.t.jones%40bangor.ac.uk%7C18307e2a20834d63b3ce08d9f4a28dab%7Cc6474c55a9234d2a9bd4ece37148dbb2%7C0%7C0%7C637809801262885395%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=d%2BIpbAzshlV97oYRUv4ABqW%2FdUJE5J9GoNrSMG2CEjk%3D&reserved=0">better regulated now</a>. </p>
<p>At the same time, the pandemic has also been a very different economic crisis to other recent ones. Most recent crises, including 2007-09, were caused by problems within the financial system – what economists refer to as an “<a href="https://www.wider.unu.edu/publication/covid-19-really-exogenous-shock#:%7E:text=Endogenous%20shocks%20arise%20from%20within,from%20within%20the%20economic%20system.&text=A%20truly%20exogenous%20shock%20would,the%20tsunami%20in%20its%20wake.">endogenous shock</a>”. Something external such as a pandemic is an “exogenous” shock, and these tend to be quickly absorbed by healthy financial systems, with growth resuming smoothly once the disruption ends. </p>
<p>Raising rates and winding down QE should be <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.ft.com%2Fcontent%2F9c153d31-6f59-43f9-b7b2-8ba269b645dd&data=04%7C01%7Ce.t.jones%40bangor.ac.uk%7C18307e2a20834d63b3ce08d9f4a28dab%7Cc6474c55a9234d2a9bd4ece37148dbb2%7C0%7C0%7C637809801262885395%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=Gpo5EstE5EsnZVwEKnyhBv4GbZT8nyL796728ToZIcM%3D&reserved=0">much more achievable</a> with today’s healthy, properly functioning financial system. It is therefore much less likely that the central banks will rescue the financial markets from a crash by U-turning on tightening out of fear that the system won’t cope. </p>
<p>How far markets fall as the economy slows down depends on many things, not least the <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fedition.cnn.com%2F2022%2F02%2F18%2Feurope%2Fukraine-russia-conflict-explainer-cmd-intl%2Findex.html&data=04%7C01%7Ce.t.jones%40bangor.ac.uk%7C18307e2a20834d63b3ce08d9f4a28dab%7Cc6474c55a9234d2a9bd4ece37148dbb2%7C0%7C0%7C637809801262885395%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=r9SHQ8zG%2FBccQRmVn7uWC%2FdEq477pY%2FTBnORkT%2FCtVk%3D&reserved=0">Ukraine-Russia conflict</a> and the path of inflation. But with the Fed put arguably no longer in play, everyone from pension holders to retail investors should tread very carefully.</p><img src="https://counter.theconversation.com/content/177506/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A market crash may be more likely than at any time in a generation.Edward Thomas Jones, Lecturer in Economics, Bangor UniversityYener Altunbas, Professor of Banking, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1588432021-04-13T11:37:39Z2021-04-13T11:37:39ZCoinbase is listing for US$100 billion on NASDAQ, but you might be better buying bitcoin instead<figure><img src="https://images.theconversation.com/files/394752/original/file-20210413-19-a4rtki.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Why buy Coinbase when you can buy bitcoin?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tula-russia-january-27-2019-coinbase-1303078000">Burdun Iliya</a></span></figcaption></figure><p><a href="https://www.coinbase.com/">Coinbase</a>, the San Francisco-based cryptocurrency exchange, is going <a href="https://blog.coinbase.com/coinbase-announces-proposed-direct-listing-3a52c4298ccc">public</a> on April 14. The company will trade under the ticker COIN and list 114,850,769 shares on the NASDAQ with an initial valuation of US$100 billion (£73 billion). </p>
<p>Instead of following the traditional initial public offering (IPO) route, Coinbase plans to post its shares straight on the NASDAQ exchange via a direct listing, a technique pioneered by big names like <a href="https://techcrunch.com/2018/03/15/spotify-direct-listing-date/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAC5fhVVaURKaljtZtkBVtUuL58--MO64hX42gwzCmJ-0--XUxUMECrQ2cPimILsdvhDcJD46vzYo5depAPvog5I1CM1gN-YN1NwIH8do4pWnd449X4PLoTyKUSUznkN3j20jAJLaaTJRAiQuPWRFrCvbnKI1aKBtcoiMZAIV5pxa">Spotify</a> and <a href="https://www.businessinsider.com/palantir-ipo-direct-listing-market-debut-2020-9?r=US&IR=T">Palantir</a> in recent years. <a href="https://www.investopedia.com/investing/difference-between-ipo-and-direct-listing/">Whereas an</a> IPO involves a company creating new shares and having an underwriter that buys them for a set price and then sells them to the market, in a direct listing a company sells existing shares and has no underwriter.</p>
<p>But what is Coinbase and why is this such as important development in the cryptocurrency market?</p>
<h2>The Coinbase business model</h2>
<p>Coinbase was founded in 2012 by Brian Armstrong, a former engineer at Airbnb, and Fred Ehrsam, who was a trader at Goldman Sachs. Their mission was to make investing and transacting in cryptocurrencies easier, more efficient and fairer. </p>
<p>The company has since risen to become <a href="https://coinmarketcap.com/rankings/exchanges/">the largest</a> cryptocurrency exchange in the US. Even though there are numerous other exchanges around the world with considerably larger trading volumes, including Binance, Huobi and OKEx, Coinbase’s growth has been incredible lately. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Coinbase CEO Brian Armstrong speaking at TechCrunch 2018" src="https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=409&fit=crop&dpr=1 600w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=409&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=409&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=514&fit=crop&dpr=1 754w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=514&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=514&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Coinbase CEO Brian Amstrong.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/techcrunch/29603361687/in/photolist-K2hb91-JXnrCB-J8V9vg-J8UvZS-J8VnFV-JXo41a-J8VaZZ-JDsm85-K5hzax-K2gDWC-JDs4KA-JV89AG-K5hnbx-K5h5xH-JV8a69-J8Uugm-J8Uos7-J8TPdG-J8UtdQ-JWzo9f-JV82Jf-J8TUom-K2gMEJ-JV8aD3-NJiZdw-M6WY4H-M6WXDe-K2gzB5-K2gX3w-J8US3B-J8U68h-NJiZhE-K2gVT7-K2gSxj-JXnhCc-K5hhkR-K2gGP1-J8UMBn-pHARdC-pHARjE-K2gL73-JV83LW-ptfVSx-K5gQEc-M6WY8R-pKGehp-J8VmAt-pthY1u-pthYpW-J8UUge">TechCrunch</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>It has just reported <a href="https://investor.coinbase.com/news/news-details/2021/Coinbase-Announces-First-Quarter-2021-Estimated-Results-and-Full-Year-2021-Outlook/default.aspx">preliminary results</a> for the first quarter of 2021, with revenue surging to US$1.8 billion. This is a ninefold increase from the first quarter in 2020 and more than the US1.3 billion that the company made in the <a href="https://www.sec.gov/Archives/edgar/data/1679788/000162828021003168/coinbaseglobalincs-1.htm">whole of 2020</a>. Net income for the first quarter is expected to be in the range of US$800 million, compared to US$322 million in calendar 2020. In the past three months alone, the verified userbase has risen 30% to 56 million people. </p>
<p>So how does Coinbase make money? It earns fees and commissions when customers buy or sell cryptocurrencies, though there is no charge to store cryptocurrencies in customer wallets. The <a href="https://help.coinbase.com/en/coinbase/trading-and-funding/pricing-and-fees/fees">fees include</a> margin fees, where Coinbase charges 0.5% for purchases and sales, although this figure can vary depending on market conditions. </p>
<p>It also charges a “Coinbase fee”, which is commission on all crypto transactions which depends on your location and the total amount of your transaction. The company also has other lines of business including international payment system <a href="https://commerce.coinbase.com/">Coinbase Commerce</a>, a Coinbase Visa card, and USD Coin (USDC), a stablecoin cryptocurrency whose price is pegged 1:1 to the US dollar. Coinbase co-founded USDC along with crypto financial services platform <a href="https://www.circle.com/en/">Circle</a>, and makes money from the stablecoin by reinvesting the dollars that users exchange for it in safe assets such as short-term US Treasury bonds. </p>
<h2>How sustainable is it?</h2>
<p>When it comes to investing in Coinbase, the same rules apply for buying any stock – there is risk and the performance of the stock will depend on demand and the company’s future success. Coinbase’s fate is obviously tied to the performance and uptake of bitcoin and other cryptocurrencies. If investors lose interest in cryptocurrencies, Coinbase’s business will be in trouble. Coinbase also has to contend with competitors arriving every day, many of whom become big very quickly. Binance, the market leader with US$39 billion in daily volumes, only launched in 2017 for example. </p>
<p>But given the surge in cryptocurrency prices, <a href="https://theconversation.com/bitcoin-why-the-price-has-exploded-and-where-it-goes-from-here-152765">especially bitcoin</a>, in the last year, there are more and more individuals and large institutions such as <a href="https://www.bloomberg.com/news/articles/2020-12-10/169-year-old-insurer-massmutual-invests-100-million-in-bitcoin?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosmarkets&stream=business">MassMutual</a> and <a href="https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html">Tesla</a> looking to gain exposure to this alternative investment. And with the COVID-19 pandemic forcing governments to spend heavily on support measures and central banks creating lots of extra money to stimulate their economies, <a href="https://medium.com/road-less-ventured/why-bitcoin-is-a-superior-store-of-value-e5464d5fd619#:%7E:text=Thus%2C%20Bitcoin%20is%20the%20only,ideal%20store%20of%20value%20asset.">many investors worry</a> about the inflation that this could cause, which would devalue <a href="https://www.ig.com/uk/glossary-trading-terms/fiat-currency-definition">“fiat” currencies</a> like the dollar and pound. Since bitcoin is designed to never have more than a <a href="https://www.buybitcoinworldwide.com/how-many-bitcoins-are-there/">maximum of 21 million</a> in circulation, it is seen by these investors as a store of value to protect their wealth from this problem. </p>
<p>Brian Armstrong himself <a href="https://www.businessinsider.in/tech/news/read-coinbase-ceo-brian-armstrongs-letter-celebrating-the-cryptocurrency-platform-filing-to-go-public-via-direct-listing/articleshow/81213015.cms">is very bullish</a> in terms of the uptake in cryptocurrencies. In a letter celebrating the platform filing to go public, he wrote: </p>
<blockquote>
<p>Trading and speculation were the first major use cases to take off in cryptocurrency, just like people rushed to buy domain names in the early days of the internet. But we’re now seeing cryptocurrency evolve into something much more important. People are using cryptocurrency to earn, spend, save, stake, borrow, lend, vote and perform many other types of economic activity.</p>
</blockquote>
<p>Nonetheless, much of this is an argument for holding cryptocurrencies themselves, so why would investors want to buy shares in a crypto exchange instead? It is a way of tapping into the huge rise in this market without actually buying cryptocurrencies directly. For investors who worry about the <a href="https://www.buybitcoinworldwide.com/volatility-index/">high volatility</a> in crypto prices, as well as the fact that it <a href="https://www.nasdaq.com/articles/3-key-takeaways-from-last-years-biggest-crypto-hacks-2021-01-19">can be stressful</a> trying to store cryptocurrencies safely, Coinbase could be an attractive alternative. This might particularly appeal to financial institutions like pension funds that take a very conservative approach to investing. </p>
<p>No doubt when Coinbase lists under the ticker COIN, it will draw a lot of attention. Demand will be high and with any listing of this size, there will be major fluctuations throughout the following few days as trading volumes will be large. But if you are interested in investing in cryptocurrencies, you are probably still better off investing in the digital coins themselves as their performance depends only on the level of demand for them. </p>
<p>The performance of COIN will depend on Coinbase staying ahead of the pack and offering cheap and secure access to cryptocurrencies, so it has an underlying vulnerability that is distinct from the assets themselves. Nevertheless, the listing will expose more investors to the cryptocurrency world and is another sign that the finanical ecosystem is starting to take notice of cryptocurrencies.</p><img src="https://counter.theconversation.com/content/158843/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns cryptocurrencies but does not hold any shares in Coinbase. </span></em></p>America’s number one crypto exchange is floating via a direct listing.Andrew Urquhart, Associate Professor of Finance, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1550842021-02-11T19:09:07Z2021-02-11T19:09:07ZInvestors swoon over Bumble’s IPO – but what exactly is an initial public offering?<figure><img src="https://images.theconversation.com/files/383870/original/file-20210211-23-1gdqo2i.jpg?ixlib=rb-1.1.0&rect=332%2C7%2C4826%2C3426&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bumble's IPO raised $2.15 billion for the women-go-first dating app.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-afp-journalist-holds-his-phone-showing-the-dating-news-photo/1203460431">Eric Baradat/AFP via Getty Images</a></span></figcaption></figure><p>Bumble <a href="https://www.investors.com/news/technology/bumble-ipo-initial-public-offering-trades-thursday-bmbl-mtch/">raised US$2.15 billion in an initial public offering</a>, or IPO, late on Feb. 10, just in time for Valentine’s Day. Investors swooned over the women-go-first dating app, buying more shares and at a higher price than initially expected, valuing the company at $8.3 billion. </p>
<p>But what exactly is an IPO? </p>
<p>As a <a href="https://wvu.academia.edu/JFluharty">finance professor</a>, I believe understanding IPOs are an important part of knowing how markets work. More interesting to me, however, is how a new type of IPO is growing in popularity – including among the Redditors who are upending financial markets – and allowing more investors than ever to buy into the “hype” when a company goes public.</p>
<h2>Why companies go public</h2>
<p>Companies use IPOs – known as “going public” – to access the deep pockets of the U.S. stock market. At the end of 2020, <a href="https://siblisresearch.com/data/us-stock-market-value/">the IPO market was valued at over $50 trillion</a>.</p>
<p>To <a href="https://www.investopedia.com/terms/i/ipo.asp">understand what an IPO is</a>, think about starting a private business. You might deposit $50,000 into a bank account, purchase equipment and start operations. However, eventually, you will run out of money if you need to expand – especially if you are growing quickly.</p>
<p>To make life a little easier, you may attempt to obtain money from your friends or family or secure a loan from a bank. Similarly, public companies can access the stock market to raise money from investors in exchange for the promise of future profits and returns.</p>
<p>But in order to do that, first the company must go public.</p>
<p>When a business decides to go through with an IPO, it first goes to an investment banker – the same way you might go to a real estate broker when you decide to sell your house. The banker does all the same things that a broker might do, such as appraising the business by determining its value and risk and trying to match the company that is going public with well-heeled buyers who might be interested in buying a share of it. </p>
<p>In some cases, the banker might act more like a used car dealer, in which case the investment bank buys the company’s shares for a set price and then sells them to other investors later on at – it hopes – a profit. </p>
<p>In any case, the company going public doesn’t sell its new shares to “regular investors.” Instead the banks handling the deal turn to their favored wealthy clients, who initially buy shares and then sell them on to the public when the stock begins trading – usually at much higher prices than they paid. <a href="https://www.sec.gov/rules/final/2020/33-10824.pdf">Legal restrictions</a> mean the average individual cannot buy shares directly from an investment bank. So you typically need to be an accredited investor to be qualified, and trading app Robinhood’s army of day traders likely wouldn’t be eligible. </p>
<p>Success for an IPO typically means two things: The company gets as much as or more money than it aimed for, and the price “pops” on the first day of trading. </p>
<p>In Bumble’s case, <a href="https://www.sec.gov/Archives/edgar/data/1830043/000119312521025246/d20761ds1a.htm">it initially offered 34.5 million shares</a> at a price of $28 to $30, but <a href="https://seekingalpha.com/news/3660867-bumble-sets-ipo-at-39-dollars-a-share">overwhelming demand meant</a> it was able to sell 50 million at $43. That allowed it to raise well more than double the capital it had earlier planned on. </p>
<p>As far as whether early investors will get a first-day boost, <a href="https://finance.yahoo.com/quote/BMBL/">BMBL surged to $70.31</a> on Feb. 11 in its first day of trading on the NASDAQ stock exchange, creating a hefty profit for investors who bought into the IPO and sold their shares.</p>
<h2>Rise of the SPAC</h2>
<p>However, there’s a new IPO method in town that is becoming an increasingly common way for companies to go public: the SPAC IPO. </p>
<p>SPAC stands for special purpose acquisition company, and they have suddenly become the next big thing among <a href="https://www.reddit.com/r/wallstreetbets/comments/gy62lm/basic_introduction_to_spacs/">Redditors on WallStreetBets</a> who <a href="https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html">fueled the skyrocketing prices</a> of GameStop, AMC, silver and other securities in recent weeks. The zero-comission trading app Robinhood, which had been the Redditors’ favored place to buy stocks, <a href="https://www.pymnts.com/news/ipo/2021/robinhood-marches-on-with-ipo-despite-gamestop-trading-debacle/">is even considering doing a SPAC</a> rather than a normal IPO as it seeks to go public. </p>
<p>The difference is that a SPAC is like an IPO in reverse. An investor-led fund does an actual IPO – raising money from other elite Wall Street types – but with a shell of a company that has no operations. Known as a “blank check” business, its entire purpose is to eventually purchase an unspecified private company, thus making it public as well, and <a href="https://www.sec.gov/corpfin/disclosure-special-purpose-acquisition-companies">typically has two years to do it</a>.</p>
<p>In 2020, there were about the same number of <a href="https://insight.factset.com/u.s.-ipo-market-spacs-drive-2020-ipos-to-a-new-record">traditional IPOs as SPACs</a> for the first time <a href="https://www.econstor.eu/bitstream/10419/177392/1/2017-02-12%20SPAC%20IPOs%20Chapter%20SSRN.pdf">since the first SPAC was created in 2003</a>.</p>
<p>The upshot is that essentially anyone can invest in a SPAC and acquire a piece of the once-private company. Of course, this is also a very speculative investment, and it’s easy to lose everything. But that can be true of any IPO, which <a href="https://www.barrons.com/articles/SB52133021052493823286804580163941038934092">have historically underperformed the market</a>. </p>
<p>In other words, as always, <a href="https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/">buyer beware</a>.</p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p><img src="https://counter.theconversation.com/content/155084/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan T. Fluharty-Jaidee does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A finance scholar explains what an IPO is, how it works and a new way companies are going public that’s winning the hearts of WallStreetBets Redditors.Jonathan T. Fluharty-Jaidee, Assistant Department Chair and Professor of Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1429812020-08-11T20:13:14Z2020-08-11T20:13:14ZInsider trading has become more subtle<figure><img src="https://images.theconversation.com/files/352123/original/file-20200811-16-wlmz2d.jpg?ixlib=rb-1.1.0&rect=280%2C178%2C2223%2C1045&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Michael Douglas in Wall Street: Money Never Sleeps (2010)</span> </figcaption></figure><p>Insider trading comes in two main forms: arguably legal and clearly illegal. </p>
<p>But, as with drugs in sport, it’s hard to tell when arguably legal ends and clearly illegal begins.</p>
<p>It is generally accepted that it is wrong to buy shares in the company you run when you know something about it that the market does not.</p>
<p>It’s especially wrong to buy shares when you are telling the market that things are much worse for the company than you know them to be.</p>
<p>But what about suddenly sharing everything – an avalanche of information – in the lead-up to a share purchase in order to muddy the waters and create enough uncertainty to lower the price?</p>
<p>Chief executives have enormous discretion over the tone and timing of the news they release, generally answering to no one.</p>
<p>A linguistic analysis of twelve years worth of news releases by 6764 US chief executives just published by myself and two University of Queensland colleagues in the <a href="https://www.sciencedirect.com/science/article/abs/pii/S0378426620300881">Journal of Banking and Finance</a> suggests they are using this discretion strategically.</p>
<p>Not clearly illegal (how can oversharing be illegal?) their behaviour can have the same effect as talking down their share price while buying, something that is clearly illegal.</p>
<h2>Spreads matter, as well as signs</h2>
<p>Earlier analyses of insider trading have looked at only the “sign” of the information released to to the share market. On balance was the tone of one month’s news releases positive or negative?</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352121/original/file-20200811-22-pl09o5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Spreads matter as well as signs.</span>
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</figure>
<p>We have looked at the “spread”, the range from positive to negative as well as the net result. </p>
<p>It doesn’t make sense to treat as identical a month’s worth of releases which are all neutral tone in tone (sending no message) and a month’s worth of releases of which half are strongly positive and half are strongly negative (stoking uncertainty).</p>
<p>Our sample of discretionary (non-required) news releases is drawn from those lodged with <a href="https://web.stevens.edu/hfslwiki/index.php?title=Thomson_Reuters_News_Analytics">Thomson Reuters News Analytics</a> between January 2003 to December 2015. It includes firms listed on the New York Stock Exchange, the AMEX American Stock Exchange and the NASDAQ technology-heavy exchange.</p>
<p>The archive scores the tone of each release as positive, negative or neutral.</p>
<p>We used the <a href="https://www.thomsonreuters.com/en/press-releases/2014/thomson-reuters-starmine-model-predicts-us-stock-performance.html">Thomson Reuters Insiders Filing Database</a> to obtain information on chief executive buying, limiting our inquiries to significant purchases of at least 100 shares.</p>
<h2>Strategic uncertainty</h2>
<p>About 70% of the chief executives proved to be opportunistic traders in the sense that they bought with no particular pattern, rather than at the same time every year.</p>
<p>We found that news releases by these chief executives increased information uncertainty by 5.8% and 3.6% in the months before they bought and in the month they bought.</p>
<p>In the months following their purchases, the positive to negative spread of their news releases returned to the average for non-purchase months.</p>
<p>The unmistakable conclusion is that their behaviour is strategic.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/insider-trading-is-greedy-not-glamorous-and-it-hurts-us-all-60792">Insider trading is greedy, not glamorous, and it hurts us all</a>
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</em>
</p>
<hr>
<p>We obtained similar results when we used other measures of buying and the tone of news releases.</p>
<p>Our results provide no evidence to support the contention that chief executives behave in this strategic way when selling shares. This is consistent with other findings suggesting that the timing of sales is often out of the hands of the sellers.</p>
<p><a href="https://scholar.google.com/scholar_lookup?title=Insider%20trading%20and%20voluntary%20disclosures&publication_year=2006&author=Q.%20Cheng&author=K.%20Lo">Previous studies</a> have found only <a href="https://scholar.google.com/scholar_lookup?title=Voluntary%20disclosures%20and%20insider%20transactions&publication_year=1999&author=C.F.%20Noe">weak links</a> between executive share purchases and the news they release to the market. This might be because those studies have looked for more easily detected (and more clearly problematic) negative news releases.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/to-protect-markets-we-need-strict-penalties-for-insider-trading-70191">To protect markets we need strict penalties for insider trading</a>
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</em>
</p>
<hr>
<p>But that’s an old and (with the advent of linguistic analysis) increasingly risky approach.</p>
<p>Our research suggests that by saying many things at once chief executives can achieve much the same thing.</p><img src="https://counter.theconversation.com/content/142981/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barry Oliver receives funding from the Australian Government</span></em></p>Chief executives have moved on from buying while spreading bad news. They’re buying while spreading uncertainty.Barry Oliver, Associate Professor, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1427072020-08-10T20:08:29Z2020-08-10T20:08:29ZThe S&P 500 nears its all-time high. Here’s why stock markets are defying economic reality<figure><img src="https://images.theconversation.com/files/351870/original/file-20200810-22-11801h8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>The stock market is not the economy.</p>
<p>This old and playful maxim is typically not true: often the stock market is a good proxy for the economy and a very good indication of what will happen to it. </p>
<p>But it aptly captures the current divergence between stock markets and the worst economic crisis in a century.</p>
<p>In the United States the NASDAQ (which include tech stocks such as Amazon, Apple, eBay, Microsoft and Google’s parent company Alphabet Inc) is now 10% higher than before COVID-19 fears crashed global markets between late February and late March. </p>
<p>The benchmark <a href="https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview">S&P 500 index</a> is now on the verge of an all-time high. Last week it closed at 3,349 points, just 1% lower than its February 19 high of 3,386. </p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="S&P 500 index, year to August 7, 2020." src="https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/351881/original/file-20200810-22-1fcexje.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<hr>
<p>Compare this reversal of fotune to the S&P 500’s trajectory after the Global Financial Crisis of 2007-8. Then it took about five years for the index to claw back its losses. </p>
<p>And this despite the US economy now being in a much worse position than during the GFC, with an unemployment rate <a href="https://www.bloomberg.com/news/articles/2020-08-07/employment-in-u-s-increased-by-more-than-forecast-in-july">of more than 10%</a>, a muddled federal government response and Congress unable to agree on a new economic stimulus package.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/will-the-gop-let-congress-send-money-to-states-and-cities-reeling-from-the-pandemic-4-essential-reads-on-the-economic-crisis-143934">Will the GOP let Congress send money to states and cities reeling from the pandemic? 4 essential reads on the economic crisis</a>
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</p>
<hr>
<p>Other national stock markets have had similar if less exuberant rebounds. From their pre-COVID highs, Britain’s FTSE 100 is still down about 20%, Japan’s Nikkei 225 about 6.5% and Australia’s S&P/ASX 200 index about 15%. Nonetheless their recoveries are still remarkable. </p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Australia's S&P/ASX 200 index, year to August 7 2020." src="https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/351884/original/file-20200810-22-wtbctx.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<hr>
<h2>The least worst best</h2>
<p>Normally stock markets tell us a lot about the economy. Buying and selling shares is a near-instant response to new information. The aggregation of those best guesses is generally an accurate indicator of the way things are going. </p>
<p>This time there might be a structural reason why the markets appear divorced from reality. </p>
<p>Investors could be bidding up stock prices because they have to put their money somewhere, and stocks are the least worst bet.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/blue-chip-volatile-high-risk-retail-investors-are-buying-while-professionals-are-selling-142985">Blue-chip, volatile, high-risk: retail investors are buying while professionals are selling</a>
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</em>
</p>
<hr>
<p>Broadly speaking, investors can put money to work in five places: stocks; property; commodities; bonds or money in the bank.</p>
<p>Property investment has become extremely risky. Values remain high due to temporary support schemes, and significant falls are likely.</p>
<p>Commodities are generic tradeable items such as oil, wheat and coffee beans. </p>
<p>Like all tradeable items, their prices rise and fall, and the pandemic has been driving them down. In April the World Bank’s <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/33624/CMO-April-2020.pdf?sequence=9&isAllowed=y">Commodity Markets Outlook</a> warned the risks to forecasts were “large in both directions”. </p>
<h2>Bonds are paying less and less</h2>
<p>What about <a href="https://theconversation.com/the-government-has-just-sold-15-billion-of-31-year-bonds-but-what-actually-is-a-bond-143598">bonds</a> – the ultrasafe investment offered by governments? </p>
<p>Their attractiveness depends on the interest they pay, and that depends on <a href="https://theconversation.com/guaranteed-to-lose-money-welcome-to-the-bizarro-world-of-negative-interest-rates-119994">expectations</a> about interest rates and inflation. </p>
<p>Both were going downhill before the pandemic, and COVID-19 has pushed them down further. In March the US Federal Reserve cut its interest-rate target range to <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm">0-0.25%</a>. The Reserve Bank of Australia cut its target to <a href="https://www.rba.gov.au/media-releases/2020/mr-20-08.html">0.25%</a> but has <a href="https://www.rba.gov.au/speeches/2020/sp-dg-2020-06-30.html">in practice</a> been prepared to accept a cash rate <a href="https://www.rba.gov.au/speeches/2020/images/sp-dg-2020-06-30-graph03.gif">closer to zero</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/weve-just-sold-15-billion-31-year-bonds-whats-a-bond-143598">We've just sold $15 billion 31-year bonds. What's a bond?</a>
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</em>
</p>
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<p>The interest rates that influence bonds also affect returns on bank deposits.</p>
<p>That leaves stocks. </p>
<p>A notable feature of the stock market’s buoyancy has been the influx of retail (at the expense of professional or institutional) investors. </p>
<p>Since the market peaked in late February they have become net buyers of stocks, while professional institutional investors have become net sellers. </p>
<hr>
<p><strong>Cumulative net buying (A$ billion)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=301&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=301&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=301&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=378&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=378&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352836/original/file-20200813-22-9yrufh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=378&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">S&P/ASX 300, January to mid-May 2020.</span>
<span class="attribution"><a class="source" href="https://theconversation.com/blue-chip-volatile-high-risk-retail-investors-are-buying-while-professionals-are-selling-142985">Carole Comerton-Forde and Zhuo Zhong</a></span>
</figcaption>
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<p>Researchers Carole Comerton-Forde and Zhuo Zhong suggest this might be due to people having <a href="https://theconversation.com/blue-chip-volatile-high-risk-retail-investors-are-buying-while-professionals-are-selling-142985">fewer other spending opportunities</a>, and more time on their hands – the so-called <a href="https://www.bloomberg.com/opinion/articles/2020-06-09/the-bad-stocks-are-the-most-fun">boredom markets hypothesis</a>.</p>
<p>Governments have helped with programs to prop up businesses, among them the US$659 billion <a href="https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program">Paycheck Protection Program</a> and Australia’s A$86 bllion <a href="https://budget.gov.au/2020-efu/downloads/JEFU2020.pdf">JobKeeper</a> and A$40 billion <a href="https://treasury.gov.au/coronavirus/sme-guarantee-scheme">Coronavirus Small and Medium Enterprises Guarantee</a> programs. </p>
<p>In April and May this year Australian government spending <a href="https://www.finance.gov.au/publications/commonwealth-monthly-financial-statements">jumped 11%</a> on the same months last year. In April, May and June US government spending <a href="https://www.cbo.gov/system/files/2020-07/56458-CBO-MBR.pdf">more than doubled</a>. It’s likely some of that money has flowed thorough to people who have used it to play the stock market.</p>
<h2>Detached from reality</h2>
<p>In the past the stock markets have fallen just before unemployment rose, heralding what was to come. </p>
<p>This happened in the US recession at the start of the 2000s and the <a href="https://www.investopedia.com/terms/g/great-recession.asp">Great Recession</a> during in the Global Financial Crisis, as the following graph shows. </p>
<hr>
<p><strong>US unemployment rate and S&P 500</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=358&fit=crop&dpr=1 754w, https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=358&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/351087/original/file-20200804-14-qc106s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=358&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<hr>
<p>What’s notable is that the stock market didn’t fall just before unemployment rate climbed this time.</p>
<p>Now, more than ever before, the stock market tells us little about where the economy is heading.</p><img src="https://counter.theconversation.com/content/142707/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Doran does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Normally stock markets tell us a lot about the economy. In 2020 that’s no longer the case.James Doran, Associate professor/Deputy head of school, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/543352016-02-22T19:06:33Z2016-02-22T19:06:33ZIt’s hard to hate a unicorn, until it gores you<figure><img src="https://images.theconversation.com/files/112106/original/image-20160219-1233-18hn0tv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The unicorn bubble could be about to pop.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>Recent <a href="http://www.reuters.com/article/us-usa-stocks-idUSKCN0VE1CI">sharemarket declines</a> at tech market darlings LinkedIn, Facebook and Alphabet highlight an issue underlying the digital economy that is often brushed off in the good times, but returns to <a href="http://www.nber.org/papers/w12011.pdf">haunt</a> investors during downturns: <a href="http://www.bloomberg.com/news/articles/2015-03-17/the-fuzzy-insane-math-that-s-creating-so-many-billion-dollar-tech-companies">valuations</a>.</p>
<p>This is a surprisingly <a href="http://www.tandfonline.com/doi/abs/10.1080/00335631003796669">touchy subject</a> because, in boom periods, <a href="http://www.jstor.org/stable/2601071">irrational exuberance</a> can tempt investors to pour money into businesses that offer an <a href="http://www.tandfonline.com/doi/abs/10.1080/1369106032000152452">elusive mirage</a>. This is why a cadre of privately listed tech companies have gained their moniker of “unicorn” (or if large enough: “<a href="http://www.businessinsider.com.au/decacorn-is-the-new-unicorn-2015-3">decacorn</a>”).</p>
<p>The basis of what these companies are worth is not necessarily the <a href="http://www.ey.com/Publication/vwLUAssets/Monetizing_digital_media/%24File/Monetizing_digital_media.pdf">monetisation</a> of their business or the ability to <a href="http://onlinelibrary.wiley.com/doi/10.1111/1540-6261.00560/full">actually earn a return</a> from it. In fact, the term “unicorn” is simply meant to denote the arbitrary valuation of US$1 billion in capital from private investors.</p>
<p>If this seems like <a href="http://www.nber.org/papers/w12011.pdf">a harrowing tale</a> from the decades past, consider this: in 2009 there were just four companies that would have been labelled as unicorns, but there are more than <a href="https://www.cbinsights.com/research-unicorn-companies">150 unicorns</a> today together worth more than US$530 billion.</p>
<p>For these unicorns, it’s becoming increasingly <a href="http://www.economist.com/news/business/21679202-some-private-technology-firms-are-having-trouble-justifying-their-lofty-valuations-rise-and">difficult to justify</a> bloated valuations. Yet we must remember that the purpose of providing valuations for companies, public and private, is to try to assess their worth in a fair manner.</p>
<p>What is worrying is that a large part of the “valuation” of unicorns has been premised on <a href="http://www.bloombergview.com/articles/2015-03-03/can-private-equity-rescue-silicon-valley-s-startups-">backroom deals</a> between <a href="http://www.pbs.org/newshour/making-sense/unicorns-and-delusions-in-silicon-valleys-tech-bubble/">venture capitalists</a> and the companies in a manner that contractually reduces the downside risk to the investor.</p>
<p>But they provide scant analytical rigour for external (market) appraisal, and when market sentiment turns negative against the industry, those “<a href="http://www.zerohedge.com/news/2015-03-18/surprise-tech-company-valuations-are-completely-made">made up valuations</a>” cannot provide any analytical point of departure.</p>
<h2>Muddying the waters</h2>
<p>That much of this is happening behind closed doors in private listings raises an issue of regulatory transparency in the sector. </p>
<p>The regulatory aspect should not be overlooked because the origin of the unicorns is <a href="http://knowledge.wharton.upenn.edu/article/why-we-should-expect-some-thinning-of-the-unicorn-herd/">in part due</a> to a legislated reduction of transparency in the technology sector by the US JOBS (<a href="https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf">Jumpstart Our Business Startups</a>) Act, that allowed a relaxation of the number of shareholders a startup could have before it would be forced to go through more rigorous public listing with the <a href="http://www.sec.gov/spotlight/jobs-act.shtml">Securities and Exchange Commission</a>.</p>
<p>Previously, 500 shareholders was the ceiling after which regulators asked companies to publicly list. This was pushed considerably higher to 2000 shareholders by the US JOBS Act. It allowed unicorns to stay private for much longer and with greater ease.</p>
<p>Whereas this approach was praised for helping startups reduce their bureaucratic burden, those oversight regulations had existed for a reason. </p>
<p>A rich literature on economic bubble formation shows that quite often their creation is attributable to <a href="http://heinonline.org/HOL/LandingPage?handle=hein.journals/catoj29&div=10&id=&page=">good intentions</a>, for example the American Dream’s idealisation of every family <a href="http://www.criticalreview.com/crf/current_issue21_23.html">owning their own home</a> working several steps down to a housing bubble. Or the <a href="https://www.aclu.org/your-right-equality-education">American ideal</a> of everyone’s right to a decent education gradually raising the risk of a looming <a href="http://info.worldbank.org/etools/docs/library/250794/session6StudentinInternationalSalmi.pdf">student loan crisis</a> (not to mention <a href="https://theconversation.com/young-educated-and-underemployed-are-we-building-a-nation-of-phd-baristas-53104">overqualified PhD-Baristas</a>).</p>
<p>The trade-offs between having a greater regulatory burden on startups on one hand, and having unicorns with perplexingly high valuations on the other, are becoming more visible as unicorns get <a href="http://www.businessinsider.com.au/blood-in-the-water-90-of-the-billion-dollar-unicorn-startups-are-in-trouble-2016-1?r=US&IR=T">into trouble</a>. Whether or not their valuations are fictitious, their losses have a <a href="http://www.wsj.com/articles/the-dangers-ahead-if-tech-unicorns-get-gored-1445832492">real impact</a> on the economy through disruptions including <a href="http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-start-up-stumbles-its-employees-get-hurt.html?_r=0">job losses</a> and economic hardship for workers.</p>
<p>There are two other factors to be mindful of in assessing the worries of the unicorns. First, investors are also in part to blame for encouraging this lack of transparency by moving <a href="http://www.ft.com/intl/cms/s/2/6ad992e6-8792-11e5-9f8c-a8d619fa707c.html">increasingly large</a> amounts of capital into private rounds of financing, such as the US$500 million <a href="http://fortune.com/2015/11/04/jet-fundraising-fidelity/">venture capital raising</a> by Fidelity Investments last year.</p>
<p>Second, there has been a <a href="http://www.wired.com/2016/01/unicorns-and-other-things-we-must-stop-talking-about-in-2016/">strong cultural support</a> for unicorn startups through the application of positive language such as the “<a href="http://www.businessinsider.com/sharing-economy-companies-like-uber-and-airbnb-arent-really-sharing-anything-2015-10?IR=T">sharing economy</a>”, “<a href="http://www.collaborativeconsumption.com/">collaborative consumption</a>”, and the “smart” technologies (smartwatches, smartcars, smartphones). This language nuances the image of unicorns in a very positive light, and encourages favourable political (regulatory) and economic (investor) sentiment towards these now beleaguered unicorns.</p>
<p>The current market jitters have led some investors to snap out of their rosy view on unicorns. But there are structural issues that continue to create an environment where artificial valuations abound, including regulation that encourages unicorns to remain private and thus reduce transparency.</p><img src="https://counter.theconversation.com/content/54335/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Usman W. Chohan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Behind the sky-high valuations of tech startups with no profit lies a structural problem supporting them.Usman W. Chohan, Doctoral Candidate, Economics, Policy Reform, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/241702014-03-13T06:18:04Z2014-03-13T06:18:04ZChina’s Nasdaq fails to get off the ground as venture capitalists look to the US<p>China’s equivalent of the Nasdaq stock exchange is failing to attract some of the country’s most innovative companies. <a href="http://www.szse.cn/main/en/ChiNext/aboutchinext/">ChiNext</a> was supposed to anchor local high-tech businesses on home soil with a secure source of funding, but foreign investors have proven to be stuck in their ways.</p>
<p>It has been evident that foreign venture capital investors <a href="http://www.reuters.com/article/2014/02/10/us-china-ipos-usa-idUSBREA191XE20140210">prefer to take their firms public on US exchanges</a>. Chinese internet and technology giants such as Renren (the Facebook of China), Jinko Solar (a major solar product manufacturer), and iSoftStone (a leading IT services provider) are among those that blanked ChiNext and went for an initial public offering (IPO) in the US. </p>
<p>ChiNext was launched with high hopes as a Nasdaq-style board of the Shenzhen Stock Exchange in late 2009. Since then it has been an active market for IPOs, attracting more than 350 Chinese firms. However, it is clear which companies ChiNext is failing to attract. And the impact is clear too: Chinese tech firms which listed on ChiNext in the two and a half years after launch had average total assets of less than USD$50 million. That compares to Chinese tech firms listing in New York during the same period which had average assets of about USD$140 million.</p>
<p><a href="http://dx.doi.org/10.1016/j.irfa.2014.02.010">Our recent study</a> shows that only a tiny proportion of the firms that went public on ChiNext had foreign venture capital backing. By contrast, the vast majority of Chinese technology firms that went public in the US since the launch of ChiNext were backed by foreign venture capital firms.</p>
<p>So why is it then that ChiNext and Chinese stock exchanges in general are not attractive venues of exit for foreign firms?</p>
<h2>Red tape, red lines</h2>
<p>At any time, there is a long queue of firms waiting to go public in China. When the China Securities Regulatory Commission (the main regulator of securities exchanges in China) <a href="http://english.cntv.cn/program/bizasia/20120203/113712.shtml">published the full list of IPO applicants</a> for the first time in early 2012, the list contained more than 500 firms, around 200 of which were waiting for the CSRC’s approval to go public on ChiNext.</p>
<p>The approval system is heavily regulated and is not free from political bias. There is anecdotal evidence that firms backed by domestic venture capitalists are favoured over those backed by their foreign counterparts. <a href="http://www.sciencedirect.com/science/article/pii/S0883902602000794">One study</a> notes that foreign-backed firms, as a result, may have no choice other than finding strategic buyers or conducting “a listing on a foreign exchange such as the Nasdaq”. <a href="http://dx.doi.org/10.1016/j.respol.2005.04.002">Another study</a> mentions that if the government is worried about foreign dominance in the venture capital industry it will continue to act in a way that is “supportive of local venture capital vis-a-vis foreign firms”.</p>
<p>For a long time, entrepreneurial Chinese firms struggled to go public in China due to strict listing requirements imposed by the main boards of Shanghai and Shenzhen Stock Exchanges. This has hindered the development of the venture capital industry as well, since firms who make initial investments struggle to sell out through a public listing in China. The launch of the Small and Medium Enterprise Board of Shenzhen Stock Exchange in 2004 was a step in the right direction, but the board did not fully meet the needs of the venture capital industry. </p>
<p>When ChiNext was launched in late 2009, it offered less stringent listing requirements and promised more as a venue for venture capital firms to cash out their investments. However, there is one crucial listing requirement at ChiNext which helps to dissuade foreign investors: it requires firms to be profitable before they apply for a listing. In the US, this is not the case for many technology firms, and it is understandable that foreign venture capitalists head for the US rather than waiting for their companies to move into the black.</p>
<h2>Liquidity tries</h2>
<p>It is a fairly basic part of venture capital strategy that they want to sell their stakes in a liquid market to make sure they get the full value of those shares. And it has been an equally established fact that US exchanges offer better liquidity than their relatively youthful Chinese peers. It is also fair to say that Chinese exchanges, and especially ChiNext as a new market, are subject to high levels of speculation from traders, leading to unnerving volatility in prices for foreign investors.</p>
<p>Both regulators and exchanges in China are aware that Chinese retail investors are relatively inexperienced in trading and they can easily fall for speculation and exhibit herding behaviour. Many of such investors buy up shares during an IPO, not to become long-term investors, but to earn a quick profit when the shares start trading.</p>
<p>Of course, there are reform efforts ongoing to improve the application process and increase transparency. It is also fair to say that as Chinese stock markets become more mature and liquid, foreign investors will have more confidence in taking their firms public in China. Easing the listing requirement on profitability would be a crucial step.</p>
<p>The fact remains though, that some of the country’s most prestigious high-tech firms prefer to go public outside China, and that is unsettling for the local high-tech industry. Even though these firms begin their life cycles as start ups in China, once they receive foreign capital, the chances are that they will end up going public in the US at which time they will bid farewell to Chinese capital markets. The risk is that this route becomes habit-forming, making it harder for Chinese investors to invest in successful Chinese companies, and harder still to foster a genuinely Chinese high-tech industry with firms born, grown – and listed – in China.</p><img src="https://counter.theconversation.com/content/24170/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ufuk Gucbilmez does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>China’s equivalent of the Nasdaq stock exchange is failing to attract some of the country’s most innovative companies. ChiNext was supposed to anchor local high-tech businesses on home soil with a secure…Ufuk Gucbilmez, Lecturer in Accounting & Finance, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/208812013-12-02T06:25:51Z2013-12-02T06:25:51ZLooking beyond the headlines shows there is no tech bubble<figure><img src="https://images.theconversation.com/files/36557/original/nxtwxrkd-1385744192.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Do you believe in bubbles?</span> <span class="attribution"><span class="source">David Jones/PA</span></span></figcaption></figure><p>There has been lots of talk lately of a “<a href="http://bits.blogs.nytimes.com/2013/11/24/disruptions-if-it-looks-like-a-bubble-and-floats-like-a-bubble/">tech bubble</a>”. The NASDAQ composite index - a widely observed benchmark of the high-tech sector - last week reached the level of 4000 for the first time since the dotcom boom thirteen years ago. </p>
<p>At the same time we read eye-catching news stories about high-profile social media stocks. Big-name companies such as Twitter and Facebook have gone public and made billions for their early investors. As these brands are well known the story and the positive sentiment about their stock prices reaches far outside of established investor circles.</p>
<p>Startup firms with ideas and technology but no track-record are again attracting huge valuations. Messaging app Snapchat recently turned down a $3 billion offer from Facebook. Investors now apparently <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/31/investors-think-snapchat-is-worth-4-billion-thats-insane/">value it at US$4 billion</a>. Snapchat’s revenue? Zero.</p>
<p>All of this is reminiscent of the “dotcom boom”. But we shouldn’t believe the hype. In making investment decisions we should read the data rather than the big news stories. Sure, there may be some extraordinary valuations around, but we aren’t in another “tech bubble”. I remember holding all those “hot” stocks myself in the late 1990s and this time round both the sentiment and the numbers tell a completely different story.</p>
<p>This chart shows how four different investment choices made on 1st January 1998 would have worked out if they were held until today. The choices are: US tech sector (Russell Technology); US broad market, or overall stock market (Russell 3000); UK tech sector (FTSE Technology); UK broad market (FTSE All Share).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/36559/original/p9cd5yk5-1385759071.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US and UK technology sectors.</span>
<span class="attribution"><span class="source">Bloomberg</span></span>
</figcaption>
</figure>
<p>The dotcom boom and bust around 2000 is clear to see. If you invested in the UK tech sector on 1 January 1998, your investment would have gone up more than five-fold at the height of the bubble. But just two years later your original investment would have dropped to 20% of its original value. Those are astonishing multiples. </p>
<p>The US experience parallels this but is less extreme. The gain from 1 January 1998 to the peak is just over three-fold. The popping of the bubble is less painful too, with performance after the burst just reverting back to that of the broader market. </p>
<p>Interestingly, since the dotcom bubble burst the performance of the UK tech sector has lagged behind that of the broader market. An investment in the UK tech sector made in 1998 would have only regained its initial value about a year ago.</p>
<p>If you had invested in the overall market you would have missed out on most of this excitement and you would have fared much better. The lines for the broad market indices look positively serene in comparison.</p>
<p>But technology investors can take heart from how “un-bubble like” things look. Recent performance of the US tech sector actually looks much the same as the broad market.</p>
<p>The choice of reference frame influences our perceptions. Perhaps the feeling of a bubble in the UK is amplified by the UK tech sector’s recent outperformance. If we redraw the above graph with a start point of 1 January 2010, this is clear to see.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/36560/original/5dcftfvj-1385762375.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/36560/original/5dcftfvj-1385762375.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/36560/original/5dcftfvj-1385762375.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/36560/original/5dcftfvj-1385762375.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/36560/original/5dcftfvj-1385762375.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/36560/original/5dcftfvj-1385762375.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/36560/original/5dcftfvj-1385762375.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Bloomberg</span></span>
</figcaption>
</figure>
<p>However, over the longer timescale we might be more inclined to see this as the UK tech sector making up lost ground, rather than a bubble.</p>
<p>Big numbers like 4000 for the NASDAQ don’t represent danger thresholds per se, although they may appear that way to uninformed minds. Even the all-time high of over 5000 would not ring alarm bells now. </p>
<p>Bear in mind that at the height of the dotcom bubble, the average company on the US tech index was valued at 200 times its earnings. Today that price to earnings ratio stands at <a href="http://www.bloomberg.com/markets/">a mere 24</a>. Tech companies today are generating far more profits relative to the price of their equity.</p>
<p>The media loves to concentrate on extremes of success or failure. We can safely ignore them. The averages indicate that if there is another tech bubble on the way, it has barely got started.</p><img src="https://counter.theconversation.com/content/20881/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jon Rushman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There has been lots of talk lately of a “tech bubble”. The NASDAQ composite index - a widely observed benchmark of the high-tech sector - last week reached the level of 4000 for the first time since the…Jon Rushman, Professor of Practice in Finance, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.