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It isn't. Wash trading generates a fake image. Everyone knows this is happening. They are saying: we invested at this price, these companies are buying our stu

It isn't. Wash trading generates a fake image. Everyone knows this is happening. They are saying: we invested at this price, these companies are buying our stuff. Your assumption is: the people making these investments are so clever...I mean, it looks really stupid...but they are so clever, they must be doing this to take advantage of other people. Reality: the people making these investments are really that stupid. Reality: they aren't creating money out of thin air, they are investing money into their customers...fine, but the bet is that their customers eventually make money (spoiler: they won't, every technological innovation has been an incinerator for cash and AI is no different). (This should be obvious too, Microsoft and Google are doing this for defensive reasons...it is like a middle-aged man buying a low spec Porsche...no, his life isn't going okay now that he has a Porsche, he is just going to be miserable but inside a different car).

brookst 3y ago
Well said. Investing in customers is the opposite of wash trading: the goal is to create value. And it’s probably better to look at it like a VC fund: the expectation is that most customers will fail, but if the next Adobe or Facebook or whatever comes out of the exercise and is heavily technically dependent on your cloud / AI infra, that covers a lot of lost investments.
fnordpiglet 3y ago
I think you’re missing the point. If I take $10 and give it to you for 10% of your company and you give it back to me to rent a room in my building I now own 10% of your company for $0 outlay and you get to use the room in my building for your business, and in these arrangement the room is rented at cost. Everyone wins in this arrangement. This isn’t stupid, this isn’t offloading capital into income. This is an efficient way to maximize my investment by effectively using existing infrastructure spend and boosting my investments cash flow position by reducing their infrastructure spend.
- nostrademons 3y ago
  That illustrates exactly the point, though. Normally when you rent a room for $10, it implies that the room is worth at least $10 to the tenant, and the opportunity cost to the landlord was < $10, otherwise the transaction wouldn't have happened. And similarly, if someone invests $10 for 10% of a company at $100 pre, they're assuming that the discounted cash flows of the company are worth at least $100. People who analyze financial statements and trade in markets assume this to be true - it's fundamental to the price discovery mechanism. But if the actual cost to the tenant was $0, the value of the service might have been any number greater than $0. And similarly, if all the money in the investment comes back to the investor as revenue, the actual cost of their $10 investment wasn't $10, it was $0. You can't make inferences about what they actually value these services and investments at, because the prices were not set by a free competitive market, they were set by companies colluding (or cooperating, depending on framing) for mutual benefit. We saw the same issue with all the food-delivery startups that were offering 6 free meals - they booked the revenue and used it to justify outlandish valuations, and they booked the promotion as a marketing expense, but the root problem is that consumers wouldn't buy the product at list price, they were only buying it because of the investor-funded promotion. Or with Groupon - it was economically unviable for the businesses that participated, but they wouldn't find that out until after their revenue could be used to justify the next funding round and cash out in an IPO. Wash-trading is just the limiting case of this, where it's apparent to everyone that the economic value of the transaction is zero because there is no actual product being traded, but a self-dealing transaction is used to set a price that other participants in the market anchor off of. The tricky part is that sometimes this tactic can be economically viable, and offering discounted or financed products is a way to get consumers to get over the activation energy of trusting a new product, and once they've converted they become regular customers of the normal product offering and go on to spend a lot more. This is the point of a sale, or a rebate, or a promotion, or a financing deal. Which I guess answers my original question about why it's legal here but not for crypto wash-trades: it can sometimes result in true economic value being provided, and it's difficult to prove malice instead of incompetence. But the caution being offered in this thread is to not take revenue figures or valuations of AI startups or cloud providers at face value, lest you be the one who is incompetent.
  - 3y ago
hnfong 3y ago
> the bet is that their customers eventually make money (spoiler: they won't, every technological innovation has been an incinerator for cash Wow.
bryanrasmussen 3y ago
> they won't, every technological innovation has been an incinerator for cash this sounds like you're saying that nobody has ever made huge profits off of technological innovations which seems to be heavily contradicted by the fact that I did not have to roll my stone wheel using a stick from my cave to work this morning.
blagie 3y ago
These investments don't seem either dishonest or stupid. Only a fool would buy compute capacity from Google (at least without a special deal), and Google needs apparent wins to sell GCE. They're paying with compute capacity for advertising. They're paying a lot less than they would otherwise be, since costs don't equal sticker price. Right now, AWS has 1/3 market share and Microsoft 1/4. Google claims 1/10th, but that's only by gaming numbers e.g. by including Google Workspace into figures. Now, they've got a massive amount of $$$ to keep those figures pumped up to maintain that 10% number. Amazon wants a bigger moat, or at least doesn't want Azure eating its lunch in the near future due to a lack of a reasonable AI service (MS is leading here, due to the deal with OpenAI). It needs a reasonable AI service on AWS. It is nowhere close to being able to make one themselves. It's giving money so it can have one, and have one from a company it's part-owner of. Thing is, both of these investments make absolute sense even without financial games, antitrust, incompetence, or much of anything else. As a footnote, if I were Amazon, I'd be looking at player like Groq. That could leapfrog Azure + OpenAI for many uses.

brookst 3y ago

Well said. Investing in customers is the opposite of wash trading: the goal is to create value. And it’s probably better to look at it like a VC fund: the expectation is that most customers will fail, but if the next Adobe or Facebook or whatever comes out of the exercise and is heavily technically dependent on your cloud / AI infra, that covers a lot of lost investments.

fnordpiglet 3y ago

I think you’re missing the point. If I take $10 and give it to you for 10% of your company and you give it back to me to rent a room in my building I now own 10% of your company for $0 outlay and you get to use the room in my building for your business, and in these arrangement the room is rented at cost. Everyone wins in this arrangement. This isn’t stupid, this isn’t offloading capital into income. This is an efficient way to maximize my investment by effectively using existing infrastructure spend and boosting my investments cash flow position by reducing their infrastructure spend.

nostrademons 3y ago
That illustrates exactly the point, though. Normally when you rent a room for $10, it implies that the room is worth at least $10 to the tenant, and the opportunity cost to the landlord was < $10, otherwise the transaction wouldn't have happened. And similarly, if someone invests $10 for 10% of a company at $100 pre, they're assuming that the discounted cash flows of the company are worth at least $100. People who analyze financial statements and trade in markets assume this to be true - it's fundamental to the price discovery mechanism. But if the actual cost to the tenant was $0, the value of the service might have been any number greater than $0. And similarly, if all the money in the investment comes back to the investor as revenue, the actual cost of their $10 investment wasn't $10, it was $0. You can't make inferences about what they actually value these services and investments at, because the prices were not set by a free competitive market, they were set by companies colluding (or cooperating, depending on framing) for mutual benefit. We saw the same issue with all the food-delivery startups that were offering 6 free meals - they booked the revenue and used it to justify outlandish valuations, and they booked the promotion as a marketing expense, but the root problem is that consumers wouldn't buy the product at list price, they were only buying it because of the investor-funded promotion. Or with Groupon - it was economically unviable for the businesses that participated, but they wouldn't find that out until after their revenue could be used to justify the next funding round and cash out in an IPO. Wash-trading is just the limiting case of this, where it's apparent to everyone that the economic value of the transaction is zero because there is no actual product being traded, but a self-dealing transaction is used to set a price that other participants in the market anchor off of. The tricky part is that sometimes this tactic can be economically viable, and offering discounted or financed products is a way to get consumers to get over the activation energy of trusting a new product, and once they've converted they become regular customers of the normal product offering and go on to spend a lot more. This is the point of a sale, or a rebate, or a promotion, or a financing deal. Which I guess answers my original question about why it's legal here but not for crypto wash-trades: it can sometimes result in true economic value being provided, and it's difficult to prove malice instead of incompetence. But the caution being offered in this thread is to not take revenue figures or valuations of AI startups or cloud providers at face value, lest you be the one who is incompetent.
- 3y ago

hnfong 3y ago

> the bet is that their customers eventually make money (spoiler: they won't, every technological innovation has been an incinerator for cash Wow.

bryanrasmussen 3y ago

> they won't, every technological innovation has been an incinerator for cash this sounds like you're saying that nobody has ever made huge profits off of technological innovations which seems to be heavily contradicted by the fact that I did not have to roll my stone wheel using a stick from my cave to work this morning.

blagie 3y ago

These investments don't seem either dishonest or stupid. Only a fool would buy compute capacity from Google (at least without a special deal), and Google needs apparent wins to sell GCE. They're paying with compute capacity for advertising. They're paying a lot less than they would otherwise be, since costs don't equal sticker price. Right now, AWS has 1/3 market share and Microsoft 1/4. Google claims 1/10th, but that's only by gaming numbers e.g. by including Google Workspace into figures. Now, they've got a massive amount of $$$ to keep those figures pumped up to maintain that 10% number. Amazon wants a bigger moat, or at least doesn't want Azure eating its lunch in the near future due to a lack of a reasonable AI service (MS is leading here, due to the deal with OpenAI). It needs a reasonable AI service on AWS. It is nowhere close to being able to make one themselves. It's giving money so it can have one, and have one from a company it's part-owner of. Thing is, both of these investments make absolute sense even without financial games, antitrust, incompetence, or much of anything else. As a footnote, if I were Amazon, I'd be looking at player like Groq. That could leapfrog Azure + OpenAI for many uses.