※ This article contains content originally published by a third party on May 11, 2023. Please refer to the bottom of the article for the copyright notice regarding this content.
※ This is a summary of the weekly research published by Matrixport on May 11th.
Twitter and Discord channels were on fire last week, blasting success stories of traders who made “life-changing wealth” through the PEPE meme coin in a few days. But is this the right strategy to accumulate wealth? Who plays low-odds games, and isn’t this the same as playing the lottery? There appears to be a difference between different socio-economic classes in how they play the lottery (rich vs. poor or utility-maximising vs. profit-maximising). This week’s ‘Matrix on Target’ looks into the right strategy to accumulate wealth.
The meme-coin PEPE rallied +9,071% into the Binance listing and peaked at a market capitalisation of $1.8bn. As the coin breaks significant trend and support levels, prudent traders should sharpen their risk management pencil. Meme coins with anonymous developer teams are always at risk of rug pulls. PEPE and other meme coins see the largest price swings during Asia trading hours.
Once again, Bitcoin has declined into the U.S. inflation data release, but unlike previous CPI announcements, Bitcoin prices fail to rebound strongly. There is also a decoupling divergence between Bitcoin and Nasdaq, with the latter implying that Bitcoin should be trading above $30,000. The fact that Bitcoin prices are 10% below that level should be a warning sign for crypto investors. The air is getting thinner, and it is time to be cautious and patient and wait for better levels and a new bullish catalyst.
The Improbability of Making Millions with Meme Coins
Last weekend, two events of relatively minor importance to their respective industries occurred simultaneously. But analysed together, we can develop some interesting conclusions and suggestions on how to become wealthy. On the one hand, we had billionaire investor Warren Buffett’s annual shareholder meeting of his Berkshire Hathaway conglomerate corporation. On the other hand, the PEPE meme coin reached a market capitalisation of $1.8 billion after a 9,071% return within less than four weeks. The contrast between these two events could not be more different.
Buffet’s investment style has largely focused on buying the U.S. economy by shadowing the growth with a basket of blue-chip stocks with funding that has been consistently 2-3% below the funding rate of his peers. This strategy was sufficient to accumulate $112.8 billion of personal wealth. Over his lifetime, the U.S. economy has shown steady growth, and simply having exposure to large (blue-chip) U.S. corporations was enough to profit from a growing economy. While only on rare occasions, Buffett made headlines with exotic investments, the bulk of his money was made with blue chip names that everybody knows – Coca-Cola, Bank of America, Apple, etc. Buffett is also 92 years of age, but there are two extremely important lessons from his success. First, investing in blue chip names without doing anything too risky is sufficient, and second, staying in the game for a long time allows for accumulating large sums of wealth. Safety plus longevity is the name of the game of becoming rich.
Buffett doesn’t buy lottery tickets or think playing the lottery is worthwhile. In 2016 Buffett said, "I mean, you know, if they want to do mathematically unsound things, and one of them occasionally gets lucky, and they put the one person on television, and the million that contributed to the winnings, with the big slice taken out for the state (government), you know, don't get on — it's nothing to worry about." In the U.S., government taxes on lottery wins are roughly 37% - the government wins every “week”.
The odds of winning the Powerball jackpot (lottery) are 1 in 300 million, while there is a 1 in 1.2 million chance of death or injury from lightning in any given year. Similarly to lightning speed, people play the lottery because of the allure of becoming rich within a few days without any work and with only a small amount of capital at risk. Over time this adds up to $200 per lottery player per year. The critical point is that everybody contributes a little capital and passes this on to a few lucky winners. In effect, socialising the losses to benefit the winner.
Another interesting aspect is that according to research reports, the lower socio-economic class (some call them the ‘poor’) always plays the lottery, whether the odds are good or bad. The higher socio-economic class (the ‘rich’) only plays when the jackpot offers the best returns. A $100m jackpot, or higher, will draw in more interest from wealthy individuals as winning a mere $10m jackpot might not offer the social mobility that would make a difference in their lives. A study done by a Harvard scholar showed that lottery sales increase when the jackpot is larger, and there is an increase in players from richer areas (as measured by sales sorted by zip codes).
While the allure of quick wealth through high-risk investments such as meme coins may be tempting, the key to accumulating significant wealth lies in a combination of safety and longevity. Meme coins may offer a chance to become rich quickly, but the odds are heavily stacked against traders, with the majority of people losing their small investments while a few lucky winners take home the grand prize. It is important to understand your own investing behaviours and motivations behind taking high-risk investments, and to always approach investing with a prudent risk management strategy.
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