Crypto Curious? You Should Be!

Wow what a week it has been in crypto! In case you weren’t paying attention, the guy whose company bought $1.5 billion in Bitcoin just a couple of months ago sent a flurry of tweets and crashed the market by 40%. Yes, Mr. Musk is not the the most popular person in cryptoland right now, and Tesla shareholders are probably not very impressed either. For people who just got into crypto this year, as the bull market picked up steam, it’s literally been a crash course in risk.

Despite this I have spent my free hours this week labouring over this post, the reason being that over the last 12 months or so I have come to the following conclusion:

If you are serious about building wealth and pursuing financial freedom, and you have not done so already, you need to educate yourself on cryptocurrency.

Notice that I’m not advising you to go out and buy XYZ coin today. I’m saying you need to study, understand the shift that is going on in this space, and act accordingly. Otherwise you could miss out on a world of opportunity.

So what do you need to get your head around? Here are a few things:

Adoption

A couple of surveys in the US have just published some interesting results. The first is Gemini’s State of Crypto 2021 report. (you can read a good summary of the report by Zerohedge here.) Then NYDIG carried out a similar survey, reported in Newsweek here. The Gemini survey of US based individual investors shows that 14% of Americans already own crypto. More interesting is that 63% of respondents are “crypto-curious”. This group are interested in learning more about crypto, with 13% considering adding crypto to their portfolios in the next year.

NYDIG estimate that some 46 million Americans own Bitcoin, and they found that many of these people would be happy to store their Bitcoin with their bank if the option was available. (see here) Banks are seeing the outflows to crypto exchanges like Coinbase and are waking up to the opportunity to offer Bitcoin and other crypto directly to customers.

We are also seeing rapid adoption in the developing world, particularly in countries like Venezuela where the economy has been poorly managed, resulting in a severely devalued local currency.

Institutional Adoption

The 2017 bull market was peppered with whispers that “the institutions are coming”. Well in 2021 they are slowly arriving. There are currently 8 filings for a Bitcoin ETF sitting with the SEC in the US, and it looks like it is only a matter of time before the first one is approved. (Canada already approved a BTC ETF) In the meantime, Grayscale’s cryptocurrency-based trusts are nearing $50 billion in assets under management!

Morgan Stanley are launching access to three funds which enable ownership of Bitcoin for their wealthiest clients. Goldman Sachs are preparing to offer clients access to digital assets from this quarter. Insurance companies are starting to invest. Hedge funds and wealthy family offices are involved. Guggenhiem Partners, who manage over $230 billion in assets, have a sizeable position in the Grayscale Bitcoin Trust, as do Ark Funds.

A growing number of publicly traded companies are now allocating part of their cash reserves to Bitcoin, and yes, at least at time of writing, Tesla is still one of them.

Inflation fears

Bitcoin is seriously starting to rival gold as the ultimate hedge against inflation. And following over a decade of money printing and quantitive easing in response to the 2008 Global Financial Crisis, and yet more stimulus to combat the economic damage wreaked by Covid-19, inflation fears have been wobbling markets in the last few weeks. With its hard-coded fixed supply, 4 yearly halving events and digital immutability, Bitcoin is programmed to be deflationary. You simply can’t print more Bitcoin, even if you wanted to.

This is why the likes of Michael Saylor at MicroStrategy are investing part of their company treasury in BTC. Bitcoin is now viewed, by some at least, as a superior store of value, an alternative to the “melting ice cube” that is Fiat currency

DeFi

The word “disruptive” gets thrown around a lot these days as technology challenges the old “traditional” way of doing things. Some may say this is just a natural progression of things, but it perhaps doesn’t feel that way if it is your business that is in the process of being disrupted! DeFi, or Decentralised Finance is threatening to disrupt TradFi, or Traditional Finance. DeFi is one of those terms that can quickly turn off people who only have a passing interest in crypto – it all sounds too complicated. To keep it simple, DeFi is removing the middleman from financial transactions, with the middleman generally being a bank or brokerage.

Here’s a good definition from Investopedia: DeFi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction.

The potential for DeFi is clearly huge, and it is in the very early stages. Expect plenty of volatility as TradFi is not going to give up easily! It is also going to be tricky to regulate as there is no central body with its HQ in a particular jurisdiction, where it can be bound by that country’s specific rules.

NFTs

Non Fungible Tokens suddenly hit the news this year when a digital collage by the artist Beeple sold for a whopping $69 million! NBA Top Shots offer the chance to own digital highlight plays, with some listed as high as $250,000. A lot of assets are accused of being in a bubble these days but this one is hard to deny. After all, if you want to look at the Beeple collage, it’s right there online to view for free and you can download a JPEG onto your computer. However, don’t write NFTs off so easily. Ownership of something digitally certified as unique can be applied to art, fashion, collectables, licenses and certifications, tickets for entertainment and more. The potential for use in gaming and virtual worlds is huge too.

Ethereum

You may have noticed a dramatic increase in price of the number two cryptocurrency, ETH recently. ETH is programmable money and much of the above DeFi and NFT ecosystems are built on its protocol. ETH is not without competition, but it has first mover advantage in the smart contracts space. There is even talk of the ETH market cap surpassing (flipping) Bitcoin over time.

Cycles and how to invest

What I wish I had better understood during the 2017 bull market in crypto, and the subsequent bear market, is that it wasn’t the first time around the track. In fact, it happened in 2013. And now here we are in the 2021 bull market. Do you see a pattern here? The Bitcoin four yearly halvings generate a clear four year cycle. And as long as BTC leads the market, this cycle applies to other coins as well. The two graphs below compare the current bull market to those of 2013 and 2017.

Source: @raoulgmi
Source: @raoulgmi

I recommend reading this excellent post on the Bitcoin four year cycle. Understanding this is crucial to formulating an investment strategy for the years to come. Despite the current correction, we are now well and truly in Phase 1- the bull market! That’s why Bitcoin is in the news and every Elon Musk tweet moves the market. The Bitcoin bull market does not go straight up, there are usually a number of pullbacks, corrections and mini crashes. Bitcoin being in the news can be both positive and negative: It’s boiling the oceans, China is banning it, India too! Believe it or not, this is the fun part!

If you didn’t accumulate Bitcoin and/or other crypto in the last couple of years, then that’s a shame, but guess what? The next phase is the bear market. During this chilly crypto winter, BTC generally declines around 80% and Altcoins possibly more – and then comes your next chance to accumulate. If there is one thing I would like you to take away from this post it is this: If you learn about crypto in the months to come you are still early. I don’t think that dollar cost averaging and buying on dips (like the one now) this year is a bad idea, but be very careful with your sizing. It is not the time for FOMO (Fear Of Missing Out) and betting the ranch. A little skin in the game will give you motivation to study, but you need to think longer term. Step up the dollar cost averaging during phase 2,3 and 4 and 2025 is your target year for enjoying the good times!

I note that there is talk in some circles of a super-cycle. That is no 80% decline this time and the bull market continues. It sounds wonderful and there would be no complaints from me if it happened, but I am not convinced and am basing my planning on the 4 year cycle. What I could see perhaps happening is ETH and perhaps some of the DeFi coins decoupling from the Bitcoin cycle and going their own way. Only time will tell on that too.

Crypto and Japan

In 2017 Japan appeared to be positioning itself as a global leader in crypto regulation, and there was even one ICO issued by a regulated exchange in Japan. (Quoine, now known as Liquid’s Qash token) However, very little of note has happened since then. Hacks at Coincheck and Zaif probably didn’t help. Only a handful of crypto assets are available on Japan exchanges and there are no stablecoins on offer. If you are looking to invest in Altcoins or DeFi coins you will need an account overseas to do so. (FTX, Kraken etc.)

Moreover, the tax treatment of crypto gains in Japan is less than friendly. Gains should be reported as miscellaneous income and are taxed at your highest marginal rate, with the maximum of 55% often mentioned in reports. I would note here that your marginal rate depends on how much you earned in the previous year and, depending on your income you may pay significantly less than 55%. Here is a useful summary of the Japan tax treatment.

You should also note that there is no offset on losses as there is with stocks. This makes me think that the best strategy in Japan is to accumulate over time and hold for the longer term. (noting that crypto moves fast and long term could mean 3-5 years) Trading aggressively doesn’t really seem worth it, although some may disagree. I would be careful of this one major pitfall: making big gains in one coin, selling and creating a taxable event, and then moving them to another coin to try to make more money but actually making a big loss. You will still be liable for the gains from that first trade, even if you don’t actually have any of the money you made left…

One way around the tax issue is using funds, and ETFs when they are finally available. Grayscale’s trusts are taxed as stock, (so 20% on gains) and I imagine ETFs will be too. (you will need a US Brokerage account though)

So be careful on tax. That said, we are talking about an investment space with massive growth potential. If you accumulate during the bear market and sell during the bull cycle and actually bank the money you probably won’t be too unhappy about paying some tax.

So what should I do again?

Educate yourself. People will tell you to only invest in what you know, but if you aren’t expanding your range of knowledge you will be stuck with a rather narrow range of investments, and you could miss out on great opportunities. Yes, you should buy some and get a little skin in the game. It will encourage you to take notice of what is going on, but take it slowly. You may feel late to crypto, but we are still at the stage where one person’s tweets can move the market by 40%. It’s still early and there is plenty of opportunity. People often ask what percentage of their assets they should have in crypto, but I think you should size your positions according to your level of knowledge and conviction.

The other big part of crypto is learning to take responsibility. Don’t invest half of your life savings because of something you saw on Twitter. (or read on a blog!) Don’t leave your coins sitting on an exchange that could be hacked – learn how to self-custody and use cold storage. People have perhaps gotten too used to handing their money over to a third party and letting them look after it for them. Connect with people who know more than you do and learn from them, but make sure to go down the rabbit hole yourself. And if after that you are not convinced then that’s fine. It’s better to make an informed decision not to get involved than to just assume something is meaningless and miss the opportunity.

Below is a list of resources to get started. I may add to these from time to time.

That’s all I have for now. Best of luck and be curious!

Resources

Podcasts: What Bitcoin Did / The Pomp Podcast

Books: The Bitcoin Standard / The Internet of Money

People to follow: @100trillionusd / @woonomic @PrestonPysh / @raoulGMI / @CryptoHayes / @RussellOkung / @glassnode / @CaitlinLong_ / @zhusu

Detailed Overview of DeFi

NFTs and Their Use Cases

Article On Bitcoin Energy Consumption

Video Interview on Virtual Worlds- Earning Money in the Metaverse

The Crypto Fear and Greed Index – I have found this to be a much better indicator than price. Buy at extreme fear, and sell, or at least be cautious, when it’s at extreme greed!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Bitcoin: It’s About to Get Loud

Well it’s official, three years after the last one, Bitcoin has set an all time high and broken through the massive $20,000 resistance point . As I write now, it’s actually trading at around $21,500. However, somehow it feels different this time around. Something is missing. It’s very, very quiet… Nobody outside the world of finance or crypto itself seems to be paying much attention.

I remember the previous all time high very clearly. Late 2017, having risen from under $1,000 earlier in the year, Bitcoin surged past $10k and just kept on marching. New highs were marked every week. Here in Japan there were crypto exchange ads on TV constantly. (remember Tetsuro Degawa and the ill-fated Coincheck?) Mr. and Mrs. Watanabe were buying feverishly as the FOMO (Fear Of Missing Out) took hold. I remember watching a news report about Kabukicho hostesses trading crypto on their smartphones. The 2017 bull run was driven by individual investors caught up in a get-rich-quick buying frenzy. And when the bubble burst they all got burned…

Fast forward three years and the landscape looks quite different. Since the halving in May 2020, Bitcoin has gradually fought its way through heavy resistance at $10k, $12k, $13k, $14k and now $20k. Mainstream news, dominated by Covid-19, economic stimulus and a soaring stock market, makes little mention of it.

Meanwhile, big things are happening: You can now buy crypto through Paypal. MicroStrategy, a business intelligence software company, has invested $475 million of its cash reserve in Bitcoin and is in the process of issuing $650 million in convertible notes, the proceeds of which will be used to buy more BTC. Square, the payments company run by Twitter’s Jack Dorsey has invested $50 million in Bitcoin. One River Asset Management, a hedge fund specialising in volatility bets, has just emerged as another huge investor in Bitcoin, with some $600 million already allocated. And also this week, MassMutual has become the first insurance company to invest in Bitcoin, dipping its toe in with a $100 million investment.

Are you feeling bullish yet?

Guggenhiem Partners, who manage over $230 billion in assets, started investing in Bitcoin when it was around $10,000. Their CIO, Scott Minerd, just shocked Bloomberg TV hosts by telling them that his firm’s analysis shows it should be worth $400,000. (Video here – tellingly Bloomberg delayed coverage of a Federal Reserve press conference to get this comment!)

Following the massive success of Grayscale Investments, Bitwise have just launched the Bitwise 10 Crypto Index Fund, which invests in the 10 biggest cryptocurrencies. The fund is available to purchase the same way you would purchase a stock or an ETF on US brokerages, and is already seeing huge demand. (not to mention a dizzying jump in price)

What is interesting here is that the reason for this underlying demand from companies and financial institutions is due largely to a change in the perception of Bitcoin, from payment system to store of value.

The original Bitcoin white paper talked of a peer to peer electronic cash system: i.e. a means of exchange, something you would use to buy your coffee, but with no intermediary / bank in the middle of the process. While Bitcoin is certainly capable of such transactions it is still somewhat clunky and there are other cashless payment methods, and even other cryptocurrency solutions, that can get the job done more efficiently.

What the likes of Michael Saylor at MicroStrategy see, is that Bitcoin acts far better as a store of value, an alternative to the “melting ice cube” that is Fiat currency. This is the role that has typically been played by gold for generations. The unprecedented expansion of Central Bank balance sheets, pumped ever higher by Covid-19 stimulus, has institutions eyeing an asset which, despite being easy to transport and store, cannot be manipulated to increase supply. You can’t just print endless Bitcoin. Understanding this shift in reasoning is essential for individual investors wondering why they should care about digital assets. (Saylor has been the guest on a number of podcasts where he talks at length about his reasoning on Bitcoin – here’s one if you are interested in listening)

Institutions and Bitcoin “whales” are certainly trading the BTC price action to some degree, but their main goal is accumulation. And compared to individual investors they have the capacity to accumulate in bulk. When dips in price scare off smaller investors and day traders, these big guys are hoovering up supply and locking it away for the long term. This level of demand combined with Bitcoin’s built in scarcity could lead to some serious price moves in the next 12 months.

So how should regular investors be adjusting to this new dynamic? If you don’t own any crypto but think you should, how do you get involved without getting burned? What follows is my two cents, for what it’s worth, in a market that changes fast. Please note that I am not a trader and do not use leverage. The purpose here is to share my thoughts on how to accumulate BTC. All the usual disclaimers apply: I don’t know your financial situation or risk profile, this is not investment advice, don’t invest money you can’t afford to lose etc etc:

  • Breaking $20k is a big deal. We could be off to the races, but new resistance levels will form and volatility is the norm in crypto.
  • Expect retraces down into the 17,000s and below, and be ready to buy these dips. It’s going to take courage as every financial news site will be screaming about the “crash” in the Bitcoin price.
  • Any kind of major macro shock, eg. a severe stock market correction, will send BTC tumbling down with it. This will be even scarier as the panic will lead investors to sell every asset they have to raise cash, as they did in March this year. Mainstream news will now be proclaiming a full-blown financial crisis. Bitcoin will be pronounced dead for failing to act as a hedge against other assets. Hold onto your hat and buy as much as you can.
  • Hold, hold, hold.
  • Assuming however, there is no such macro shock. Things are about to get interesting. Just as big dips are possible, so are big moves up.
  • Accumulation is best done little by little over time, and the same goes for selling a rising asset. If the trend is up, don’t fight it. Sell a little at a time unless you are already looking at life-changing values. (when kabukicho hostesses start trading again and Degawa pops up, it’s probably time to think about getting out!)
  • I’m not going to guess how high it’s going to go. If you are looking for price models, charts and research here are some people worth following: @100trillionusd / @woonomic / @PrestonPysh / @raoulGMI
  • When BTC takes off, altcoins generally follow. Personally I would stick to the top 10 in the Bitwise fund. I have no idea where Dogecoin will land in all this!

By the time you read this, prices could already have changed significantly. This is a fast-moving space. Whatever happens, I don’t think it will stay this quiet for much longer. Things are about to get loud!

With that I’ll sign off. Wishing you a safe and enjoyable holiday season and an exciting 2021!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Why is Bitcoin Valuable?

BTC Scarcity

I’m writing this today with Bitcoin having once more passed the $10,000 mark. It’s quite remarkable to think that a digital asset that didn’t even exist until 2009 can be valued at such a level. Is it pure speculation? Or is there something particular about BTC that makes it valuable?

One person who has an answer for that question is known as PlanB, an anonymous Dutch institutional investor who created the Bitcoin Stock to Flow (S2F) model. According to his website, the name PlanB refers to “an alternative plan to quantitative easing (printing money by central banks), negative interest rates, and currency debasement in general.” His online handle, @100trillionusd, “is a reference to the Zimbabwe 100 trillion dollar note during the 2008 hyperinflation.”

If you really want to understand what the S2F model is, you should go straight to the following two articles from March 2019 and April 2020 respectively:

Modeling Bitcoin Value with Scarcity

Bitcoin Stock-to-flow Cross Asset Model

If this is a bit too much heavy reading I will attempt to summarise briefly:

The bottom line here is scarcity, Bitcoin is scarce in the same way that silver and gold are scarce, but it can be transmitted over the internet. The S2F model aims to put a value on this scarcity.

Stock refers to the existing stockpile or reserves of something. Flow is the annual production. Gold has a high Stock to Flow ratio – it would take 62 years of gold production to get the current gold stock. Around the year 2022 Bitcoin’s stock to flow ratio will overtake that of gold.

It is high stock to flow that makes something monetary goods. Low stock to flow goods can easily be over-produced, thereby crashing the price.

Supply of Bitcoin is fixed. As new Bitcoins are mined, the miner that found the block is rewarded. Over time those rewards are cut in half at regular intervals, know as halvings. The halvings and the fixed supply are the reason that Bitcoin’s stock to flow increases over time.

Working on the hypothesis that scarcity (SF) drives value, PlanB created a statistical model. What he found is that there is a statistically significant relationship between stock-to-flow and value. (the price of Bitcoin) Interestingly he also found that gold and silver are in line with the Bitcoin model values for SF. Of course other factors also affect price, but he found scarcity to be the dominant driving factor.

So what could it mean for the future price of Bitcoin? The initial modeling predicted a $1trillion valuation sometime after the May 2020 halving. This would mean a price of $55,000 per Bitcoin in the next year or two.

“People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs.” (Modeling Bitcoin Value With Scarcity)

The Bitcoin stock-to-flow cross asset model in the second article then revised this to a market value of $5.5trillion in 2020 – 2024. Which translates as $288,000 per Bitcoin. Yes, that’s the kind of number that can get your attention! Whether it turns out to be accurate or not will be something that’s very interesting to watch over the next few years. (particularly if you have some skin in the game)

Clearly my explanation above has been highly simplified. If you find this interesting and / or need a lot more persuading, please do read the two articles posted above and follow PlanB for more: @100trillionUSD

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

Where to invest ¥100,000 today

yen-2177672_640

It’s been a while! I hope everyone is doing ok in these difficult times. The state of emergency in Japan has been lifted and people are cautiously getting back to something like normal life. Looking at news from around the world it seems we are lucky to be living in a country that has weathered the Covid-19 storm so well, and I’m certainly looking forward to getting out and about a bit more in the coming weeks.

I note that Japan residents are starting to receive the paperwork  for the ¥100,000 government cash assistance scheme. If you are not sure how to make your claim, here is a useful thread telling you how to complete the paperwork.

For some people, this money is clearly needed to replace income lost during the corona virus crisis and ensuing state of emergency shutdown.

However, if you are lucky enough not to need this money to cover expenses, and are thinking of putting it to work, below are a few ideas as to how you could invest it today. Please note I am trying to make these interesting “satellite” type ideas. It is of course perfectly acceptable to simply add this money to your core asset allocation – it’s just not as fun!

Cash is king – ok I know I said “invest”, but now is not such of a bad time to be holding cash. After a steep drop in March, stock markets have rebounded remarkably well, but this does not disguise the fact that the economic damage from Covid-19 is significant. The US unemployment numbers really don’t fit with where the S&P 500 is right now, and with America and Europe trying to reopen even before they have got through the first wave, there’s a chance of further extended lockdowns and more market panic to come. Keeping cash for now and investing when fear takes over is not a bad strategy.

Precious metals – Gold is well known as a safe haven in times of market turmoil, but there is a growing buzz about the gold to silver ratio, which suggests that silver is a compelling buy at the moment. In short, the amount of silver it takes to buy an ounce of gold is near an all-time high, which suggests it should revert to the mean over time. This article does a good job of explaining why silver could make a good investment right now. As for how to buy it, if you are not looking to take delivery of the physical metal you can simply buy a silver ETF via your brokerage account. iShares SLV is perhaps the best known silver ETF.

gold-to-silver-ratio-2020-05-28-macrotrends
Source: https://www.macrotrends.net/1441/gold-to-silver-ratio

Cryptocurrency – Following the halving on May 11th BTC has traded between $8,500 and $10,000, despite a negative Goldman Sachs client briefing on the digital currency. The Grayscale Bitcoin Trust is said to have purchased a third of all newly mined Bitcoin in the last 3 months at a total of $29.9 million, and this retail investor demand is combined with heavyweight trader Paul Tudor Jones declaring himself a holder of BTC. This would be a high risk place to put your ¥100,000, but you are at least guaranteed an exciting ride.

Biotech – I mentioned this in a recent post on satellite holdings. With the race for a Covid-19 vaccine hotting up, Biotech / Pharma / Healthcare are obvious areas of interest. Also with more and more countries heading toward the Japan aging population model, it makes a lot of sense as a long term buy and hold. Picking winners is not easy in this space so it’s probably best to look at ETFs.

I hope these ideas help. I would love to hear if you are investing your stimulus money elsewhere. Of course this money is being given out to stimulate the economy, so you are doing a good thing if you simply go out and spend it in your local community. Covid-19 is likely far from over so please stay safe as you get back to work!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

Spice up your Investments with Satellites

satellite-693224_1280

Is the Covid-19 market plunge getting you down? Tired of being told not to panic and stay diversified? (by people like me!) Are you thirsting for something interesting and exciting to invest in rather than the usual steady and boring stuff?

Then this post is for you! Let’s look at something fun! However, before we jump in, please read here to make sure you understand what I mean by Core / Satellite holdings. In short, core is the sensible diversified allocation linked to your base currency and risk profile that you put 80-90% of your money in. Satellite is the other 10-20% where you swing for the fences!

Some areas that are typically classed as satellite holdings would be: hedge funds, direct stock picking, commodities, structured notes, private equity, biotech, property and cryptocurrency. This is by no means a definitive list and there are many other investments that would be considered non-core, depending on your risk profile.

Here are a few unique satellite holdings that I have come across recently:

ARKK – Ark Innovation ETF: Run by Cathie Wood, the Best Investor You’ve Never Heard of, Ark is a stock picking fund, focussed on innovation in DNA Technologies, Energy, Automation, Manufacturing, Next Generation Internet and Fintech. Ark are currently looking rather smart for their heavy backing of Tesla. Their holdings contain a heady mix of 3D Printing, Gene Therapy, Biotech and Blockchain Technology. This level of active management in highly specialised areas would usually come with a hedge fund 2 and 20 price tag, but the expense ratio is just 0.75%. ARKK is listed on the NYSE so you will need a brokerage account that can access that exchange to access. More here.

GBTC – Grayscale Bitcoin Trust: According to this article, a recent study by brokerage giant Charles Schwab showed that GBTC is in the top 5 holdings for Millennial investors, (currently aged between 25 and 39) ahead of Netflix and Walt Disney. GBTC offers investors access to Bitcoin returns via their brokerage account. The Trust trades like a stock or ETF and, for a 2% annual fee, it takes care of the issue of custody of crypto, so you don’t have to worry about losing your private keys. Bitcoin purists would probably rather hold the real thing, but GBTC is proving popular as an alternative way to get exposure to Bitcoin returns. This could be interesting with the upcoming Bitcoin Halving on the horizon. I would note that not all brokerages allow trading in GBTC. From what I can tell it is available in the US on Schwab, Etrade, TD Ameritrade and Interactive Brokers. More here.

CHNA / CNCR – Loncar China Biopharma ETF / Loncar Cancer Immunotherapy ETF: Given the origin of the novel corona virus Covid-19, China Biopharma is kind of a hot topic right now. Despite the current panic, this article argues that now could be a good time to buy. Companies in the Cancer Immunotherapy space are harnessing the power of the body’s own immune system to offer an innovative alternative to current treatments, which makes for an exciting and potentially rewarding investment opportunity. Loncar’s ETFs are NASDAQ listed. More here.

If you are living in Japan or elsewhere in Asia and looking for a US brokerage account then your best bet for getting an account open is probably Interactive Brokers. See this post for more details on brokerage accounts.

Hopefully that’s helped take your mind off the doom and gloom. Please note that these are not recommendations, and all of the investments mentioned should be considered as belonging in the High Risk category. That’s why they are satellite holdings. We are talking about around 5% of your total investments in any one of these strategies. Please feel free to share any interesting satellite holdings you like. I would love to hear from you.

Note: I have no affiliation with any of the investment companies mentioned above.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

What is the Bitcoin Halving?

 

bitcoin-2868703_640

If you follow cryptocurrency, you may well have heard about the upcoming Bitcoin halving, or halvening. So, what on earth is a halvening and what could it mean for the price of BTC?

What is it? – The halving refers to the reward paid to miners being reduced in half. Miners add “blocks” to the blockchain by performing transactions. Currently they earn 12.5 Bitcoins for each block added, but that will reduce to 6.25 Bitcoins.

When will it happen? – One block is added to the Bitcoin blockchain roughly every 10 minutes. Halvings typically occur every four years or so and this will be the third halving to date. If nothing major changes it is due to take place in May 2020.

What effect will the halving have on the price of Bitcoin? – Well, nobody knows, but previous halvings have seen an increase in the price of Bitcoin. The simple theory goes that as supply is cut short, miners will charge a higher price for their Bitcoins. The number of Bitcoins to be mined is fixed at 21 million, so each cut in new supply makes Bitcoin more scarce, and therefore more valuable. However, past performance is no indicator of future results. Some commentators believe the halving is already priced in, while others are predicting a severe drop in price before the halving even takes place.

Here’s an interesting price chart showing the previous halving dates.

My view is that Bitcoin is worth accumulating whenever the price dips, as it will pay off in the long run. However, price volatility can be severe and cautious investors should, of course, be careful of overcommitting. Crypto investing is not for the faint hearted, but it will be interesting to watch what happens after May next year.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

 

Bitcoin – Are you Accumulating?

2019 Masters

After day two of the recent US Masters Golf, a friend of mine asked me who I thought he should bet on. My answer was somewhere along the lines of “My heart says Tiger, but my head says Molinari”. Shows where rational thinking can get you sometimes…

Luckily, when it comes to calls on a speculative asset like cryptocurrency, you don’t need my opinion to help decide if it’s worth a flutter. Tuur Demeester’s head and heart have been in Bitcoin for many years and he has been writing informative reports on the leading cryptocurrency since 2012. His latest report is here and I highly recommend you read it.

Although a little technical at times, the main points are quite clear:

  • Big investors (whales) are accumulating Bitcoin
  • We’ve seen this kind of bear market scenario before
  • Smart investors don’t try to buy the exact bottom, they accumulate when they know they are around it
  • Lower prices and shocks are still possible
  • Bitcoin expected to trade in a range of $3,000 – $6,500 before the next bull market breakout

Obviously I’m not saying you should be putting all of your savings into crypto, but given the potential for returns it’s worth considering a small allocation of money you can afford to take risk on.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Diversifying Through Crypto – How Digital Assets Could Change Your Retirement Plan

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Sticking with the theme of cryptocurrency this week, I came across this fascinating research paper  on the role that digital assets can play in asset allocation. While I recommend you read the report yourself, I appreciate that not everyone is enraptured by talk of efficient frontiers and Sharpe ratios, so I will attempt to summarise the main points of the paper into something more easily digestible.

First of all, here’s a post I wrote previously about asset allocation, which may be a good refresher. As noted there, modern portfolio theory is about diversification, specifically, blending various asset classes to produce good returns with the lowest possible risk. Over the long term it is possible to estimate the future behaviour of various asset classes and blend them to together to create an efficient frontier portfolio, whereby the return is optimized to the level of risk.

Efficient frontier
https://grayscale.co/a-new-frontier-research-paper/

What makes the development of a new digital asset class so interesting is the opportunity to add it into the mix and create an allocation that is more diversified than traditional portfolios. A well diversified portfolio contains a blend of assets which are not strongly correlated to each other. So the key to success is not necessarily finding better performing assets, but properly combining uncorrelated assets. In short, to widen the net and capture a better return without greatly increasing the risk.

The graphic below shows a simple simulation of how this could work. It takes a typical portfolio that is 60% global stocks and 40% global bonds, (Global 60/40) and shows how the performance and risk characteristics change by simply adding an allocation to bitcoin:

Figure 5
https://grayscale.co/a-new-frontier-research-paper/

As you can see, a 1% allocation to Bitcoin increases the return over the time period without greatly affecting the level of risk. A 5% allocation to bitcoin moves the risk needle a little more, but the cumulative return is almost double that of the Global 60/40.

This can then be taken a step further by adding a blend of digital assets rather than just bitcoin:

grayscale_fig8
https://grayscale.co/a-new-frontier-research-paper/

It seems that the extra diversification achieved through a range of digital assets has a significant positive impact on the risk/return profile of this portfolio. This can be attributed to the fact that although digital assets appear to go up and down together, they are not perfectly correlated.

I’m not going to get into Sharpe ratios in this post but you can get a definition here. From a financial planning perspective I do think it is worth a look at Figure 12 and Figure 13 in the paper, which give an interesting simulation of how someone saving for retirement could benefit from an allocation to digital assets over time:

grayscale_fig12
https://grayscale.co/a-new-frontier-research-paper/

Assuming $100,000 in starting capital and an annual contribution of $18,500, this gives us an idea of how adding a 5% allocation to a blend of digital assets to the Global 60/40 can affect risk/return results over time. Although the increase in annualised return is only 0.3% for a similar level of risk, the effect of compound interest over the years turns this into a meaningful dollar figure at the end:

grayscale_fig13
https://grayscale.co/a-new-frontier-research-paper/

Now this is, of course, a simulation and there is no guarantee of achieving these returns over time, but it certainly makes for a compelling argument for allocating a small portion of long term investments to digital assets. Having said that, we are still some way from being able to click a button and add a 5% allocation to crypto to a retirement plan, which means investors currently have to figure out how to buy and store these assets safely themselves. However, there is already talk of bitcoin ETFs, and crypto funds that are accessible to retail investors are starting to appear. It looks like making an allocation to digital assets as part of your long term investment strategy is about to get easier.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Bitcoin Price Prediction

Top 11 Bitcoin Prediction

I recently read here that bitcoin bull Tom Lee has reduced his target for the price of bitcoin at the end of 2018 from $25,000 to $15,000. It’s actually amazing that people are willing to make put their reputation on the line about something as volatile as cryptocurrency, but as the above graphic shows, Mr. Lee is not alone in making bold predictions.

It’s interesting to note that two American economists are right down at the bottom with predictions of $100. They are far from the only “experts” who have a negative view with Bill Gates and investor Peter Schiff both expecting bitcoin to go to zero.

So should we all be buying bitcoin and betting on it going to a million dollars, or is that just reckless speculation?

First of all, no-one knows where this is really going, and there’s certainly a lot of speculation involved. Before making a decision, I would suggest reading up on the reasons people think bitcoin will reach a certain value. Yes, you should study up on the views of Tom Lee and Jim Cramer, as well as those of Joseph Stiglitz and Kenneth Rogoff. In fact, Peter Schiff is a good person to follow if you’re looking for the ultimate bitcoin bear.

Here’s another way to look at it. The bitcoin price as I write today is around $5,500:

How would you feel if you bought one bitcoin today and the price went to zero and you lost $5,500?

How would you feel if you didn’t buy bitcoin and the price went to $250,000? How about $1,000,000?

These two questions alone should tell you a lot about the way you view risk. There’s no correct answer, just what works for you.

FYI I bought originally at $2,500 and just bought a little more at $5,500 – that’s not advice, just disclosure. And no, I don’t have a price prediction for end of 2018, 2022 or ever!

If you simply enjoy reading the predictions there are a few more here, although this was from October before Tom Lee adjusted his outlook.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

 

 

Cryptocurrency Trading Basics

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Having written a couple of posts on Bitcoin and how to protect yourself when trading / investing in cryptocurrency, I thought I would share some basic information on the trading side. Please don’t expect any high level technicals, trading charts or buy / sell recommendations; I’m still learning this myself. I bought Bitcoin around May last year and have been holding it ever since. I have no intention to sell it in the near future.

However, the volatility in crypto makes trading hard to resist. I started trading in January this year on Quoinex, a Japanese exchange. Quoinex ticks all the boxes for security that I mentioned in my previous post. It also has its own cryptocurrency named QASH, along with other well-known tokens such as BTC, BCH, ETH and XRP.

So, here are some basics to get you started, based on my experience so far:

Select an exchange – are you going to trade in Japan or overseas? See my previous post on how to protect yourself when selecting an exchange.

Account opening – The initial application involves filling in your basic information online. For Japanese exchanges this may require some Japanese language ability. You will need to upload a proof of identity and in some cases a proof of your residential address. In Japan, the exchange verifies your address by sending a postcard by registered mail that you have to sign for. You should also set up two-factor authentication to protect your account. This involves downloading an authentication application such as Google Authenticator to your phone and pairing it with your account.

Deposit – If you are depositing FIAT currency you will first need to register your bank account details. Once these have been approved, you can then create a funding request. Then you follow the instructions to wire money to the exchange. If you are depositing Bitcoin or Ethereum you will create a funding a request and then follow the instructions to transfer BTC / ETH to your exchange account. If you are planning to send a large amount it is a good idea to do a smaller test transaction first and make sure it arrives safely.

Buying and selling – Once your account is open, verified and funds have been deposited, you are ready to trade. If you are new to this I would suggest starting small while you get used to the trading interface. The basic orders you will use to begin with are market orders and limit orders. A market order allows you to buy / sell at whatever price is available at the time. A limit order allows you to specify the price you want to buy / sell at and matches you with bids / offers at that price.

The first thing you should learn how to read is the Order Book. This shows you a real time list of bids / offers on the exchange for the particular token you are looking at. This gives you a picture of how much is being traded at the moment and at what price. You will see two prices here: the bid price is the price that traders are willing to buy at right now, and the offer price is the price traders are willing to sell at.

Be very careful using market orders. Cryptocurrency is extremely volatile and the price can move considerably in a matter of minutes. Just because “X Coin” is now trading at 100, it does not mean your order will get filled at that price, particularly if it’s a large order. You may get partially filled at 100, and then the rest of your order gets filled at all kinds of different prices. Some new traders have had nasty shocks, finding that they have just bought at a much higher price than they expected.

Limit orders are much safer. With a limit order you can specify that you want to buy at 100, and your order will get filled whenever other traders offer to sell at that price. Unlike stock accounts, where typically limit orders are “good for the day” unless you specify otherwise, crypto limit orders are good for as long as you want to keep them. This is particularly useful if you don’t have all day to watch the markets. You can select the price you want to buy or sell at and come back later to check if your order has been filled or not.

Margin trading – most exchanges offer the option of using leverage. Essentially you are borrowing money from the exchange to increase the size of your order, and taking on significantly more risk in the process. Given the volatility of crypto markets I would advise extreme caution with leverage. Personally I don’t use it at all.

Withdrawal – once you are done trading you are free to withdraw your money from the exchange. Depending on the exchange, it can be sent back to your bank account in FIAT currency, or you can transfer BTC / ETH back to your own wallet. Remember that coins left sitting on an exchange are at risk of hacking and theft. Also note, particularly for traders in Japan, that a withdrawal creates a taxable event. Make sure you are aware of this before you move money or tokens.

Tax – I will talk about Japan in particular here. As noted above, making a withdrawal (which includes transferring tokens to another wallet outside Japan) creates a taxable event. Crypto gains in Japan are treated as miscellaneous income and you will need to declare them and pay tax at your marginal rate. For high earners this can mean up to 50% tax on gains. Calculating the profit itself is no easy business. This post provides a useful guide in English. I am already aware of one company in Japan that will assist (for a fee) in calculating cryptocurrency gains. I’m sure we’ll see more companies like that spring up in the near future, along with applications linked to exchanges to make the calculation easier.

I hope this helps people with an interest in crypto trading to get started. As always, I would stress that cryptocurrency trading carries a high degree of risk and you should only trade amounts commensurate with your knowledge. Start small and be prepared to make mistakes you can afford.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.