We asked Paul Veradittakit of Pantera Capital, the
leading institutional investment firm that focuses on blockchain and
cryptocurrencies, about the three most important questions to ask yourself when
investing in cryptocurrency.
Here are his answers.
1) Know your risk appetite
As with any investment, investors need to consider their
ability to shoulder losses. Just how much can you stand to lose in the event
that things go south? To this end, Paul advises people to ask themselves:
“What’s your risk appetite? This is a new space and there
are a lot of unknowns.”
We often hear about the risk inherent in cryptocurrency.
When investing in any particular coin or project, it’s important to keep in
mind your appetite for risk.
How much are you willing to risk? While many
cryptocurrencies and related projects have what’s referred to as “asymmetric
upside” (meaning the potential rewards outweigh the potential risks), that
doesn’t mean you’re guaranteed to win (ever).
There have been too many failed blockchain projects to
count. That’s why being diversified counts.
2) How diversified do you want to be?
The second question investors should be asking is how
exactly they want to invest.
Diversification is often best accomplished via an investment
vehicle like an exchange-traded fund (ETF) rather than buying a coin on an
exchange or through an ICO.
“Do you want to invest in companies or projects directly, or
do you want to buy into a vehicle like a fund or an index?”
This is a point many people might never stop to consider.
Simply exchanging fiat for a coin on an exchange is not the only way to invest
in cryptocurrency, although it might be the most common.
This also plays into the third question.
3) Are you investing in things you’re passionate about?
This one is simple. Yet most investors might never consider
it.
“It really helps to understand what you’re investing into…if
you’re not willing to do the research, you should invest in an index or a fund
or something that is diversified.”
Legendary investor Warren Buffet is well-known for his
famous quotation saying that he only invests in businesses that he understands.
M is the country’s oldest and most reliable retailer.
The dividend discount model shows that M is trading just below fair value.
Now is a good time to buy the dips.
Macy's (M) is the best bet in a struggling retail sector. Despite a prolonged downtrend in the share price, there remain reasons to be bullish. The stock appears to be trading at or near fair value and has an excellent dividend yield, so buying dips will be a profitable strategy going forward.
Retail hasn't been doing so well. The number of store closures in 2019 has surpassed 8,200, beating the 2017 record of 8139. The number will likely be higher by year-end as the fourth quarter has only just begun.
There has been some debate about a "retail apocalypse." Some commentators think it's nothing out of the ordinary, some think it's all because of Amazon and online sales, and others think it's a sign of the US consumer struggling.
Given that 90% of all retail purchases happen at physical retail locations, we can rule out the possibility that online shopping has much to do with store closures. According to data from the US Census Bureau News provided by the Department of Commerce:
E-commerce sales in the second quarter of 2019 accounted for 10.1 percent of total sales.
Overstock.com
(NASDAQ:OSTK) has been
trending lower for months now ever since its January 2018 peak at $85. Despite
having already fallen over 86% to $11.19, there is still time to be short OSTK,
as it will soon test long-term support at $9.00.
I like
Overstock. But I would still short it, like many other investors over the past
year.
Just 12 months
ago, it seemed as though Overstock had the potential to turn itself around. tZERO was going to be revolutionary, like
discovering cold fusion. OSTK was even planning on divesting its entire retail
business and going full blockchain. This was going to change the course of
history by allowing securities to be tokenized.
Today, however,
things have changed.
Crypto Couldn’t Save OSTK
tZERO has been a total disaster. The blockchain-based utopian
visions of Byrne have evaporated.
In 2018, Byrne
was quoted by The Wall Street Journal as making the following statement:
“I don’t care whether tZERO is losing $2 million a month…we think
we’ve got cold fusion on the blockchain side.”
The amount of negative-yielding debt in the world is going parabolic.
There’s a correlation between negative interest rates and safe-haven assets.
Although asset prices have been climbing for the last decade, economic activity hasn’t been keeping pace.
Chances are, you’re not ready for what’s happening or what’s coming. The
full realization of what it means to have negative-yielding debt going
parabolic has yet to hit the average investor.
The smart money has been on the move for some time, though. We can see this
in the skyrocketing gold price against most fiat currencies around the globe
(gold has hit all-time highs in at least 72
different currencies so far in 2019). It’s also apparent in the
cryptocurrency market growing from seven billion USD three years ago to now
being valued at several hundred billion.
In addition, there's a growing correlation between the amount of
negative-yielding debt outstanding, the price of gold, and the price of
bitcoin. All have been going up in lockstep.
The Connection Between Debt, Gold, and Bitcoin
If you look at trendlines for the support levels of negative-yielding debt
and gold over the last six months, the angle is quite similar. The same thing
goes for the resistance trendline for BTC/USD.
Given that bitcoin still has a
large base of speculators in its market, it makes sense to follow the
resistance rather than support. Big profit taking tends to happen on any price
increase to a degree not present in the gold market.
Bitcoin also has the added
variable of new miners coming online, who tend to take profits in fiat to cover
their operating costs. The bitcoin hash
rate hit a new all-time high in July. This is supportive of prices in
the long-term but maybe not in the near-term.
Now, here's the trend of increasing amounts of negative-yielding bonds:
The trend for the price of gold as measured in dollars:
And the trend for the price of bitcoin as measured in dollars:
As you can see, the rate of increase is almost identical for all three.
The timeframes are slightly different – the trend with negative-yielding
debt is almost a perfect 45-degree slope upwards since September 2018. Gold
and bitcoin have only seen such steep rises since around April or May, however.
So, there has been at least a seven-month lag between the time interest
rates go deeper into negative territory and the time at which investors flock to safety. This makes sense when you consider that it takes time to realize
what’s going on, liquidate assets, and move capital. But now that the process
has begun, things will accelerate much faster going forward.
Investors who have suddenly realized they are at risk of having their money
stolen from them are seeking refuge in safe-haven assets. Gold is the go-to
safe-haven asset. It always has been and always will be. And while bitcoin’s
status as a safe haven may still be debatable to a degree, the price action of
gold and bitcoin have been increasingly correlated as of late.
My argument is
that it doesn’t matter what you believe about bitcoin, its economics, or even
the blockchain technology that powers it. Investors have begun perceiving BTC
as a safe haven, and that perception becomes a self-fulfilling prophecy.
Keep in mind that the negative-yielding debt chart from Bloomberg (the first
chart shown in this article) only goes up until March of this year, at which
time the total figure was under $10 Trillion.
Since then, the trend has been
going parabolic (vertical even), with the total now reaching beyond $16
trillion (this number is hard to keep up with. By the time you read this, the
figure could easily be one or two trillion higher).
It’s hard to make connections between negative interest rates and anything
happening in the economy because this has never happened before. Negative rates
are without precedent. The fact that the correlation between rates/gold/bitcoin
is so striking says a lot about what’s happening and what’s coming.
The Crash Isn’t Coming - It’s Here
You’ve probably been hearing about a historic crash coming for a long time
now (especially if you read Zerohedge). And you’ve certainly been hearing
rumors of a possible recession from every financial news media pundit and their
mother over the course of the last six months.
Here’s what you haven’t heard: they’re all wrong. The crisis isn’t far away
in the future. It’s here and now. While it may be some time before things get
so bad they can no longer be hidden and most media outlets admit this, the data
doesn’t lie.
What data am I talking about? Well, the charts I just showed you, for
starters. Those indicate that sovereign bonds, once the ultimate safe-haven
asset, are now becoming much worse than just a risk asset - they're becoming a
guaranteed loss. As such, money has begun flowing out of fixed-income assets
and into fixed-supply assets, i.e. gold and bitcoin, which have a finite and a
fixed supply, respectively.
But the final nail in the coffin for the global economy in terms of data
illustrating its demise is M2 velocity of money. The velocity of money
is sometimes referred to as the pulse of an economy. And the patient is
dying.
M2 money velocity is a measure of the rate at which currency changes hands
throughout the economy. As you can see, money in America has been moving slower
and slower for decades. As the Fed ended its zero-interest-rate-policy (ZIRP),
M2 money velocity stopped tanking and has begun to flatline instead. Progress!
Some might say this is a myopic view and that only looking at a single
metric doesn’t give a clear picture of economic activity. I would argue that it
does because this one metric invalidates so much of the “everything is great”
narrative we have been bombarded with for the greater part of the last decade.
If unemployment is low and main street is doing just fine, why has money
velocity been trending lower for decades?
If banks are lending to businesses
who are buying and selling things, how has that not caused the velocity of
money to pick up in earnest? If increasing asset prices indicate a strong
economy, why has this not been reflected in the velocity of money?
This Wasn’t Supposed to Happen
Quantitative Easing and lower rates were supposed to be a temporary,
one-time thing. They were intended to prevent worldwide economic collapse.
Instead, these policies ensured that the real economy that died in 2008 would
appear healthy until more debt and currency printing couldn’t cover the rotten
corpse any longer.
Stocks in the US are high because of corporate buybacks fueled by corporate debt
borrowed at zero interest. Unemployment is low because people have dropped out
of the labor force. Banks have remained solvent because the Fed printed
trillions of currency units and gave it to them for free (at zero interest) to
keep their balance sheets propped up.
Negative-yielding debt going vertical isn't so much a canary in the coal
mine or a black swan as much as it is a mass die-off. After years and years of
monetary stimulus, the diminishing returns it provides are no longer working.
In fact, the returns are becoming negative.
Investors have begun to understand this and are acting accordingly. The
entire monetary paradigm is shifting. Are you ready?
What do you have to say about this?
Do you think negative interest rates have begun altering the financial system in a fundamental way? Or will none of this change anything?
Leave your thoughts in a comment below.
[Update on 9/5/19 – Former Fed Chairman Alan Greenspan says "it's only a matter of time" before negative rates come to America.]
