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Hello Bubble Riders!

This post began with the following infographic (original Twitter post here).

I’d never heard of CULT and I know every project in the top 250 well. It turns out that (according to CoinGecko) that CULT is ranked 997 by market cap.

Despite that, it ranks #2 in social media activity.

This means that the project could be mispriced and significantly undervalued in the way that the Murakami project appears to be.

Admittedly, I was at first skeptical for two reasons. To begin, when you stake CULT to get dCULT, you are entitled to a % share of the protocol’s proceeds. Because you earn passive interest that would seem to make it a security. This spells trouble for the investment thesis.

Even if the current misperception were rectified, so that people realized that CULT was undervalued given its significant social activity, Gary and the SEC (I know, it sounds like a band name) would shut it down–to “protect” retail investors. It’s a sort of Catch 22. Grow too big, and get shut down. Remain undervalued and no significant price appreciation would materialize.

I also worried that this was a sort of Ponzi scheme, even if a refreshingly open one–they did name it CULT after all. The way the protocol operates (documentation here) is by way of a DAO, a decentralized autonomous organization. This organization collects 0.4% of all transactions with CULT into its treasury. The more people transact the coin the more the treasury collects.

That sounds a bit like a Ponzi since the DAO appears to make money by people joining.

Despite that, CULT launched (effectively) in March of 2022 and has earned HODL-ers 251% since then. That means that it launched into the early phase of the crypto winter and has still been gaining. I thought it deserved a bit of due diligence as a result.

The first thing I learned is that CULT is genuinely a decentralized autonomous organization. The code runs on the internet and cannot be altered–not by the founders, the guardians, the regular dCULT holders, or anyone. It is not “in development” with a road map, etc. It’s finished and immutable. That means that it’s truly decentralized and hence fails to meet the “common enterprise” criterion of the Howey Test (which is used to identify investment contracts).

Gensler and the SEC will not be coming by to play their favorite song.

But what about the Ponzi portion?

The purpose of CULT is to function as a decentralized venture capital firm that invests in start-ups that further the goals of decentralization. The “cult” of CULT is a set of strong value commitments to decentralization and social benefit. All projects that they fund must support those goals in a direct and explicit way.

What that 0.4% from transactions does is provide a reserve basis for investing in those projects.

1. Members may submit a proposal for investment.
2. The guardians–the top 50 CULT holders–vet the proposals.
3. Once accepted, the DAO votes (and guardians are excluded from this process).
4. If the vote to invest passes, then the DAO buys the coins in the new project. Each purchase is for 13 ETH worth of the project.
5. Successful investments allow dCULT members to claim their share of rewards.

They also created the RVLT coin for smaller, individual investments that range for between .5 and 1 ETH. This coin was hacked and they are relaunching it. This explains, in part, why CULT is down by 90% since it’s all-time high in April of 2022.

CULT has a fully diluted market cap of about $11m, so 100x is possible. Current holders will face about 25% dilution over time, which is not bad. The treasury also stands at 45 ETH, so they’re sitting on some dry powder for new projects. I do think, then, that long term holders are now going to be in a better position.

Still, I think 3 key changes could be made for a better version.

1. They need to stop making payments in CULT when distributing earnings. They should take a page from the GLDN team and make payments in PAXG–in gold. That avoids diluting early coin holders.
2. I think that exclusive focus on new start-ups is not ideal. Scale-ups are better investments. And with enough money, it might be interesting to undertake “activist investing” in the crypto space = buying enough of the voting rights for a protocol to make it do something different.
3. The 13 ETH investment cap is also too limiting.

As an example of Activist Investing – it would be possible to orchestrate an over the counter offer to save MAI and own a key stablecoin with massive cross-chain compatibility. MAI has been "wrekt" by the multi-chain protocol hack, not because MAI itself had problems. It’s ripe for a VC infusion and reorganization.

I suppose there are 2 take-home points here. First, CULT might be significantly mispriced. Due diligence surrounding the RVLT hack, though it doesn’t affect CULT’s operation at all, is needed. Second, this is a model for an investment DAO that is both legal and functional.

It’s tempting to follow that model and make a few adjustments so that it would be more effective.

-Sebastian Purcell, PhD

The Macro Situation

“Let's go." "We can't." "Why not?" "We're waiting for Godot.”

― Samuel Beckett, Waiting for Godot

The Fed has met. We’re not even close to “there” yet. The road is straight but longer than expected. What’s in store?

At least one more rate increase this year, and higher rates for a longer duration. Goldman Sachs has updated its forecast for rate cuts, which are not anticipated until Q4 of 2024.

Jobless rates have fallen to their lowest in almost 8 months. Due to “the higher for longer” strategy, bond yields are climbing and look as if they have not reached their peak. A faint silver lining is that the difference between the 10- and 2-year bond yields, a recession indicator, has decreased.

Markets did not take the news so enthusiastically. Looking at this week’s move from highs to lows: Dow -2.3%, the NASDAQ -3.8%, and the S&P 500 -3.2%.

Other effects from the Fed’s meeting: Gold is still hanging with the US dollar (105.58). GLD initially reacted positively and then settled down in view of higher rates. Meanwhile, crude oil has clawed its way back to the $90 level after digesting the prospect of “higher for longer”.

On the horizon in addition to watching inflation data?

How much is the market anticipating a potential government shutdown at the end of the month? A shutdown means markets will suffer, bonds will most likely benefit.

- Todd Mei, PhD and Sebastian Purcell, PhD

AI Sentiment Report

The following sentiment scores use ChatGPT as part of the AI tech stack to track sectors as leading indicators. (Lesson 4 of The Art of The Bubble covers the selection of lead indicators for bubble trades). The scores are most indicative for the next day of trading (a Monday), but they appear to set the general tone for the next week.

The methodology employed is based on this peer reviewed academic article, which produced 550%+ results in back tests over a 2 year time frame. We consider 4 and 5 scores to be positive, but please bear in mind that the AI model is still in its validation phase.

-The Research Team:

Dom Viera, Samantha Russell, Nicole Zinuhova, Aiza Malik

Happy Trading!!

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