The SportsFolio Journal - January 14, 2021


When you start typing “NBA players …” into the Google search box, and the first suggestion Google makes is “NBA players with COVID,” that should be a signal that this thing must be taken seriously.

More positives have been coming out of the NBA. Even worse, multiple players tested positive for a second time. A pause is on the table.

We want this thing to work out, just like any other basketball fan. We also think that health and safety should be over everything else. We’re all in this together. Sports are great when they unite us, when they give us a relief valve and when they are used as a platform for societal change. 

Ethically speaking, when sports are helping to contribute to hospitals running out of oxygen and ICU units, shouldn’t they press pause?

Alabama Crimson Tide fans flood the streets of Tuscaloosa after the team's college football championship win against Ohio State Monday, Jan. 11, 2021.. PHOTO BY JAMES BENEDETTO /Tuscaloosa Thread/via Reuters
Alabama Crimson Tide fans flood the streets of Tuscaloosa after the team's college football championship win against Ohio State Monday, Jan. 11, 2021.. PHOTO BY JAMES BENEDETTO /Tuscaloosa Thread/via Reuters


Why does the SEC exist?

It has a three-part mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

One relevant question to ponder is whether today’s investors are protected. One event, in particular that happened this last week, started with this tweet by Elon Musk, who briefly overtook Jeff Bezos as the richest man in the world, before returning to second place

Elon Musk was likely referring to Signal, the messaging service that can be used as an alternative to social media messenger, WhatsApp. It is affiliated with Signal Foundation, a non-profit, one of the co-founders being none other than Brian Acton, a co-founder of WhatsApp. When it comes to tweets, this wouldn’t even come close to making the list of the most controversial tweets by Musk. There is also the “pedo guy” tweet and the “funding secured” tweet. The “Signal” tweet is absolutely nothing in comparison.

The significance of this latest tweet is not what it said, but what happened afterward. What did “investors” do? They got the “signal” and hopped onto the bandwagon for a stock of a completely unrelated medical devices company, Signal Advance Inc. (SIGL). The stock was trading below one dollar last week. On January 8, it closed at $7.19. A couple of news pieces came out talking about the irrationality of the stock price ascent. With fuel on the fire, SIGL just kept climbing, closing at $38.70 the following Monday. It came back down to earth on Tuesday, closing at $10 flat, and then came down further, closing at 8.43 on Wednesday. It is still up by more than 1,000%! 

The whole thing is fascinating and frightening at the same time. Market efficiency theorists have no idea what to do with this one. Is this idiocracy at its finest?

Not so fast, says Matt Levine, Bloomberg Opinion Columnist. In his view, this is neither algo-trading creating an almost endless loop, nor dumb traders. Instead, he thinks this is rational behavior if you believe you can get out in time. Academia, of course, has long known that there can be rational bubbles

When Elon Musk tweets out “Use Signal”, he has every right to do so. Musk is not disclosing material information about his own company, he is not even making a stock recommendation. He is just opining on a messaging platform.

Traders, on the other hand, are free to buy and sell whatever they want, at the price they want, using whatever information they want to use.  

Yet, the unmistakable reality is that somebody ends up holding the bag. Somebody bought Signal, perhaps with stimulus check money, and instead of giving the economy a jolt, it made somebody else, presumably some quite rational homo economicus rich. 

The question is, should we do something about it? If yes, what can be done about it?

You can say, well too bad, caveat emptor (“let the buyer beware” in Latin).

This is true, to some extent. At the same time, the primary purpose of the securities laws was to move away from that philosophy. As one court has noted (emphasis original):

A fundamental purpose … was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.

A key observation: the way buyers would get the short end of the stick in the olden days was informational asymmetry. To be clear, that is still an issue today. However, today’s world is suffering from another pair of problems, each of which is a substantial issue in its own right. 

  1. Gamification of trading: Robinhood is at least partially to blame for this. This is a favorite topic for Matt Levine: trading is fun, not much else is fun, at least not during the pandemic, ergo, let’s trade. Hooray! 

  2. Financial illiteracy: confusion around financial concepts - investing, speculation, assets, etc.

When somebody buys Signal stock, because Musk is viewed as God and he told his followers to use Signal, this is at least partly a result of gamifying the investment culture. The SEC went after Robinhood for information disclosure issues, as they should; no company should be allowed to misrepresent or conceal facts. 

The lawsuit you probably did not hear about in Massachusetts is equally important. The complaint is here (pdf). Here is one excerpt:

For years, Robinhood has unscrupulously engaged in conduct that exposes Massachusetts investors to potential harm. Specifically, Robinhood has: targeted young individuals with little or no investment experience; lacked adequate infrastructure and, as a result, experienced repeated outages and disruptions on its trading platform; used gamification strategies to manipulate customers into continuous interaction and constant engagement with its application; encouraged inexperienced investors to execute trades frequently; and failed to follow its own written supervisory procedures when approving customers for options trading.


That suit will likely get tied up in courts for years, with no tangible result (we hope to be wrong on this one). Make no mistake, though, that is the suit that matters. 

Maybe trading as an entertainment concept goes away when COVID is gone. Maybe not, because, hey, if this thing is really fun, why should anybody stop doing this? Unless we limit retail trading to a sophisticated set of people (driver’s licenses for trading anyone?), this is a tough one. In any event, if this is happening not because of dumb traders, but quite sophisticated rational actors that just know when to stop, it may be naive to expect that this won’t happen even if retail traders are fenced off. All that said, gamification is a real issue, and at the very least, operators should not be allowed to exploit a human desire (entertainment) to make money. 

The gamification of investing is one thing. The second issue is definitional. Bitcoin is not an asset and one cannot truly invest in it. The “sharks” see the issues. Marc Cuban is warning us. Kevin O’Leary thinks it is a giant nothing-burger. Here is a perfect example of using Twitter to advance an opinion: Brett Scott lays out one of the best characterizations ever made for Bitcoin. He puts the argument to bed that Bitcoin is an effective currency, and since it is not an asset either (he doesn’t say that but it is implied), he demotes it to a “cyber-collectible”. Then, he demotes it again, by making the point that collectibles at least have some features, but bitcoin really doesn’t have any. (He had a book published in 2013, The Heretic's Guide to Global Finance: Hacking the Future of Money, that has made it onto our checkout list and looks like he has a new book coming soon). Aswath Damodaran, the “Dean of Valuation,” also has a timeless blog post, in which he argued Bitcoin is not an asset and one cannot invest in it. 

Yet, the other side is stacked, too. James Surowiecki, the author of Wisdom of Crowds, agrees that Bitcoin is not really a currency when he resolves the characterization question in the direction of an asset. Christine Lagarde, the President of the European Central Bank, just called Bitcoin a highly speculative asset and the SEC has also characterized Bitcoin as a digital asset

Do you see the tension here? It is perfectly clear what the threshold question is:

What is an asset?

That question is of fundamental importance. 

If Bitcoin is an asset, then arguably it should be traded like every other asset. 

If Bitcoin is not an asset, we have two choices. Either, we ban it outright or in the alternative, if we prefer a more liberal approach, perhaps it can still be traded like an asset. It is apparent, that we as a nation want to experiment with digital currencies (even when it doesn’t seem like they can ever become currencies) and we seem to be ok with people trading collectibles even if some of them will blow themselves up along the way (if Bitcoin is a collectible, it is certainly at the lower end of the spectrum). In any event, it should be crystal clear that what is being traded is not an asset, and a Bitcoin purchase is not and never will be an investment decision. 

That is something the SEC can surely do something about.

Sports & Money

If Bitcoin is the next best thing since sliced bread, pondered JohnWallStreet on Sportico, what will be his role in the sports ecosystem?

Apparently, “Not much,” said Marc Cuban. 

Cryptocurrencies have “evolved from a goal of being a currency to a store of value that is more like gold,” [and] if [they are] not used as a currency, I’m not sure [of] the impact.

Marc Cuban also exchanged jabs with Tyler Winklevoss (of Facebook fame) on Twitter, essentially pointing out that Bitcoin is not an asset.

Well … If Bitcoin is not a currency, and it is certainly not an asset, let’s please keep it out of sports. Sports is not the place to be poisoned with financial machinations that don’t serve a purpose and we already have sports collectibles, thank you very much. 

Another financial machination that doesn’t serve a purpose is a sports bet, and the state of New York seems to be taking one step closer to putting it into law. Governor Cuomo included it in his State of the State address. 

We propose state sponsored mobile sports betting to raise additional funding. We are a fiscally responsible state; we only ask for an equitable partnership from Washington.

There is a “tiny” problem. Sports gambling is against the constitution and this is precisely where DFS finds itself, with two court losses under its belt.

Cuomo first circulated a lottery-style idea, then switched to a single operator type model, presumably because he read Daniel Wallach’s commentary, at least that’s what Wallach wants you to believe in

Wallach, of course, can be credited with popularizing the idea that mobile is nothing but a new form of delivery, and therefore New York can legalize mobile sports betting. The whole thing is a house of cards in our opinion, and Wallach himself is not confident about the argument, as is evident from his Twitter storm. He is basically saying the legality is shaky (correct!), that the 1984 Attorney General opinion is problematic for the sports betting efforts (correct!) and Cuomo is making a mistake by picking one provider, because disgruntled operators will litigate the heck out of it, potentially resulting in the demise of the entire NY sports betting structure. (Well … Cuomo is making a mistake by considering sports betting in the first place!)

Let’s think about this for a second. If the legality is shaky, it is shaky regardless of whether the operations are awarded to one provider or many. If it is against the Constitution, it does not matter whether there is one operator or 100. 

What Wallach is saying is effectively proof of why democracy in America is approaching a point of no return (maybe with the Capital Hill mob we are past that already, but we digress). What Wallach is saying is that what matters is not what the laws say, but how many big-money interests are hurt by allowing a scheme to go up in potential violation of the laws. If big money is on both sides, then, maybe we have a chance to go where the laws lead us. If you give all of the big money interests a lollipop, then there is no big money left on the side of truth, and the laws are being held hostage to big money, notwithstanding the fact that the laws are supposed to serve the people. 

We’ve had this discussion before. More specifically, the state of New York had this discussion. A 1984 New York Times article stated:

State-sponsored gambling is a sordid substitute for equitable taxation of all the people.

Honestly, change the date and you can print this tomorrow. Even the governor’s last name does not need to change, as, at the time, it was Mario Cuomo, Andrew Cuomo’s father. 

The article predicted exactly what would happen if the Governor (the elder Cuomo) passed a law that would amount to a constitutional violation: 

Mr. Abrams's announcement, however, will make it virtually impossible for him to defend the Governor and Legislature if they enact the idea and are challenged in court. 

This is, of course, what the younger Cuomo has done with the passage of the Interactive Fantasy Sports Law. 

Governor … please don’t make the same mistake again. Gambling is for losers, investing is for winners. New York deserves better.