The Economist February 19th 2022 Finance & economics 69T
heancientsknewthesourceofreal
terror. Lions, snakes and goats (ap
parently) are scary creatures to stumble
across, but it is the combination of dif
ferent bits of them that is the stuff of
nightmares. The Chimera, with the head
of a lion, the body of a goat and the tail of
a snake, whose “breath came out in
terrible blasts of burning flame”, was a
truly fearsome beast. Yet crossbreeds can
also be cute and cuddly. Just think of
labradoodles.
What about financial crossbreeds?
Are they minotaurs or maltipoos? Fin
ance has adapted and innovated at a
frenetic pace over the past few years. In
2019 there were hardly any deals using
specialpurpose acquisition companies
(spacs), blankcheque vehicles which
take firms public via a merger. In 2021
they raised $163bn of capital and agreed
to take 267 firms public.
As recently as 2020 few people had
heard of nonfungible tokens (nfts), the
cryptocurrency chits attached to pieces
of digital media, such as a picture or
video. But interest rocketed after Beeple,
a digital artist, sold one for $69m at
auction at Christie’s almost a year ago.
Cryptocurrencies and associated trading
platforms entered the mainstream.
Institutional investors now chatter about
including bitcoin in their portfolios.
Coinbase, a cryptocurrency trading
platform, went public in April 2021. It has
a market capitalisation of $45bn.
As these newfangled technologies
and financial vehicles have grown in size
and scope they have begun to mate. First,
in July 2021, Circle, a Bostonbased com
pany which issues usdctokens, a type of
stablecoin pegged to the dollar, agreed to
merge with Concord Acquisition, a spac
founded by Bob Diamond, a onetime
boss of Barclays, a bank, in a transactionthatvaluedCircle at $4.5bn. Then in De
cember 2021 Aries Acquisition, another
spac, announced plans to merge with
InfiniteWorld, a Miamibased nftand
metaverseinfrastructure platform valued
at around $700m.
Keeping up? There’s more. Not to be
outdone, on February 11th Binance, a
cryptocurrency trading platform founded
in China, announced it was making a
$200m investment in Forbes, a publisher
and ranker of billionaires, ahead of Forbes
going public via a merger with the mod
estly named Magnum Opus, another spac.
Binance’s rationale for backing the union,
its boss helpfully explained, was that
media is “an essential element” as crypto
currencies, blockchain technology and
“Web3”, the supposed next generation of
media and internet businesses where
cryptoholders run socialmedia plat
forms, come of age.
What should an investor make of all
this? It is tempting to dismiss these new
beasts—call them Crypspactaurs—as
nonsense. There is nothing particularly
cute or cuddly about the way spacs typically treat their investors. In part thanks
to the fat slice of shares grabbed by deal
sponsors, investments in premerger
spacs have underperformed major stock
indices by around 30 percentage points
on average. Add in the risks typically
associated with cryptoventures and
some punters may conclude that it looks
more appealing to invest with the next
Bernie Madoff.
That may also explain why these
crossbreeds are yet to reach maturity.
InfiniteWorld has not yet completed its
merger with Aries. Circle and Concord
have not tied the knot either, despite
announcing their coupling around eight
months ago. The Binance investment in
Forbes, meanwhile, seems at least in part
motivated by the prospect of the Forbes
spacdeal otherwise failing to come off.
The $200m infusion replaced those
mulled by other outside investors, who
appear to have got cold feet. Perhaps the
Chimera and the Crypspactaur are alike:
not because they are both monsters, but
because they are both seemingly myth
ical creatures.
Still, the prospect of facing the bright
lights of public equity markets might be
just what is needed to sort the puppies
from the pigs. When quizzed about why
the Circle spactransaction was taking
longer than some others, Jeremy Allaire,
Circle’s chief executive, explained that to
enter public markets “companies have to
be in a position where they have to meet
necessary regulatory, disclosure and
accounting standards so that the public
can invest. That is a good process.” But it
can take longer still for firms like Circle,
which are “a very new kind of financial
institution”. Only when one of them
actually goes public will it start to be
come clear whether Crypspactaurs are
beasts to fear or pooches to pet. ButtonwoodBehold the CrypSPACtaur
Are financial crossbreeds monstrosities or labradoodles?dom. That draws in more participants. In
prediction markets, by contrast, the game
is zerosum, says Eric Zitzewitz, an econo
mist from Dartmouth College. The payout
of one trader is the loss of whoever takes
the other side of the bet.
A bigger turnoff may be lack of liquid
ity. Sophisticated investors will be reluc
tant punters if they cannot make large
trades with ease. In 2002 Deutsche Bank
and Goldman Sachs, two banks, launched a
market for trading event contracts—simi
lar to what Kalshi now offers, though only
open to large investors—on major macro
economic data releases such as employ
ment numbers. It closed some years later,
most likely because investors who wanted
to trade on such data stuck instead with
bets on the entire stockmarket using op
tions and share indices; traditional assets
had much larger volumes and were there
fore easier to trade. In many cases liquidity
matters more than having a perfect hedge,
says a trader at a large investment bank.
Looking abroad offers a clue to where
volume might come from. Smarkets, a
popular betting exchange in Britain, where
regulations are lighter than America, hasseen the most activity on major political
events. The American presidential election
in 2020 was its largest market to date, with
more than £20m ($27m) traded, says Mat
thew Shaddick of Smarkets. Kalshi’s politi
cal markets are also finding some success:
its most popular to date was on whether
Federal Reserve chair Jerome Powell would
be replaced by December 2021. Markets on
elections, however, have yet to be ap
proved in America. Mr Mansour says Kal
shi is “working with regulators” tochange
this. Perhaps prediction marketsshould
open a market on their own success.n