Crazy for Cryptos!

Crazy for Cryptos!
Feb

8

2018

Crazy for Cryptos!

The CME launched its highly publicized Bitcoin futures contract last month. Should you Make Room for Crypto Currencies in YOUR Portfolio?

Aside from the nosedive of the US stock market this week , there is no hotter investment story in 2018 than the rise of the cryptocurrency. And the rock star of them all is Bitcoin.

If you think the recent crash in bitcoin’s value dampened enthusiasm for this crypto, you’d be wrong.

Bitcoin Mania: Valuable diversifier or high stakes gamble?

I learned all I needed to know about bitcoin last month when I received a call, out of the blue, from a distant cousin I have not spoken with directly in over 30 years.

“Hi James,” she said, “it’s Margaret, your cousin.”

“Hi Margaret,” I replied, puzzled.

“Are you able to place orders for Bitcoin?”

So much for catching up after all these years.

Not “Gee James I know you’ve been doing that commodity thing for the last 30 years or so, I hear you’re pretty good at it. Maybe you can give me some investing advice.” None of that. Just Bitcoin – can you get it? Can you get me MY STUFF?!


…there seems to be a NEW and VERY SHINY CASINO on the trading block: The Bitcoin /cryptocurrency market is in full force ….

Keep in mind, Margaret is not the first person I would think of when somebody mentions the word “investor.” She has not, shall we say, always made the most positive of lifestyle choices in the past. And I am guessing, from the odd story picked up here and there, that she was not rebalancing her portfolio for the upcoming year.

More than likely, Margaret is one of the hordes of the general public who suddenly become traders when something “big” hits the news. But to paraphrase a famous investor back in 2000 “You know when your cab driver is giving you stock advice, its time to get out.”

Bitcoin, however, has its own particular nuances as opposed to thetech stock craze in the 1990s or say, the great tulip mania.

Big with the Younger Folks

For instance, its HUGE with the younger generation. The Bitcoin bug has bit Millennials hard. For one reason, its highly accessible to them on a media they understand. Secondly, it takes very little money to “play.” Anyone can buy bitcoin for an allocation of as little as $20 on the unregulated exchanges that deal in bitcoin directly. Thus, Its easy, cheap and what many may see as the quick road to riches. It can move lightning fast. They can double, triple, even quadruple their money in a day. No more of this “invest when you’re young, grow it slowly over time and enjoy it when you’re old” nonsense. Bitcoin is instant gratification – a big draw for the tech raised Millennial.

Millennials

Crytocurrency Market: Millennials are “crazy attracted to it.”


Our client, Wendy Patiak, sent me a humorous email the other day about how she had to “have a talk” with her Bitcoin enthusiast sons about the differences between real investing and the casino. In her words “…there seems to be a NEW and VERY SHINY CASINO on the trading block: The Bitcoin /cryptocurrency market is in full force and young people are crazy attracted to it !!”

Crazy attracted they are. Maybe because its new. Maybe because its tech. Maybe because they think it’s the next Apple and their chance to “get in early” or maybe they just love the fast action of it. But probably more because its what they see as “theirs.” As in “The old folks don’t know anything about this and it moves like lightning. We LOVE it!”

Its for the Big Boys Too

Its not just the kiddies making lunch money bets when it comes to cryptos.

As many as 84 crypto-currency hedge funds started out in 2017 – investing over $2 billion in bitcoin and other cryptocurrencies.*

As an accredited investor, you also qualify to invest in Bitcoin Investment Trust, a defacto exchange traded fund that trades over the counter. Its also the only bitcoin investment that you can make in most retirement or brokerage accounts. And it is attracting its share of affluent investors. Dollar volume of the Bitcoin Investment Trust (GBTC) has surpassed even the mighty SPDR Gold Trust (GLD) on some days lately.* (*Source: The Wall Street Journal)

And finally, the CME, to much fanfare, announced the launch of its first bitcoin futures contract last month.

If you want to allocate capital to cryptos, the vehicles are certainly available. The question is, do you want to?

Sound Investment for Growing Your Wealth?

You can make a case for Bitcoin as the next Amazon or Google. Brilliant, disruptive, revolutionary. It moves like a rocket and gigantic gains in a short period of time are attractive to anyone. We’re humans. That’s how we’re wired.

But it crashes like a rocket too. Its not just a volatile investment. Its suicide squad, insane, upside down volatility. Not to mention, nobody knows if it will even be around 5 years from now. Bitcoin is nothing more than a cyber form of online currency. Its something you can use to buy something, like a dollar, a euro or an ounce of gold.

government

Cryptocurrencies are not backed by any government.


Both the upside and problem with crypocurrencies are, they are not issued by any government which means they are not backed by anything, nor are they controlled by anyone. Governments do not like losing control of things, especially in the monetary realm. And they are taking note.

South Korea hinted at banning trading in Bitcoin earlier this month. Values dropped 14%. Other nations are taking various steps to clamp down on trading.

Merrill Lynch has prohibited its roughly 17,000 advisors from executing client requests to trade Bitcoin Investment Trusts – likely off of the volatility fears.

Does that mean you shouldn’t buy it? Maybe. Maybe not.


Growing and protecting wealth responsibly does not typically involve “moonshots,” at least not with the kids’ inheritance.

I’m not here to tell you what to do with bitcoin. It could very well be the next Apple and 10 years from now and anyone who got a piece of it will be rolling in piles of cash. Or it could flame out in 6 months and be utterly worthless.

The Oracle on Bitcoin

As for my opinion, I will cede to an investor greater than I – the one and only Warren Buffet. It has become almost cliché to quote Buffet anymore. His quotes and investment style are the most often cited, overused and in some cases misused of anyone on the planet.

And yet, as I watched his live interview with Becky Quick on CNBC a couple weeks back, I couldn’t help but be awed. The man is87 years old. His partner, Charlie Munger, is 94. They both still get up in the morning and go to work, running one of the most (if not THE most) successful investing operations in the world. Both still intricately involved in daily operations and still sharp as tacks. These two are the REAL DEAL, the rarest of the rare in a sea of pretenders. They don’t call him “The Oracle” for nothing. When they talk we should ALL be listening.

Becky asked Buffet about bitcoin. Buffet was gracious and didn’t want to rain on anyone’s parade, nor discourage anyone from doing what they want to do. When pressed however, he said “GENERALLY I CAN SAY ALMOST WITH CERTAINTY THAT THEY WILL COME TO A BAD ENDING…”

Warren Buffet

Buffet on Cryptos: “…they will come to a bad ending.”


When asked why HE didn’t invest in Bitcoin, Buffets words were, as always, direct and brilliantly simple: “THERES NO REASON. I GET INTO ENOUGH TROUBLE WITH THINGS I THINK I KNOW SOMETHING ABOUT. WHY IN THE WORLD SHOULD I TAKE A LONG OR SHORT POSITION OF SOMETHING I DON’T KNOW ANYTHING ABOUT? WE DON’T HAVE TO KNOW WHAT COCOA BEANS ARE GOING TO DO OR CRYPTO CURRENCIES – WE JUST HAVE TO FOCUS ON 8 OR 10 STOCKS.”

Stocks he likely knows everything about.

And there you have it.

Sound Investments vs Bitcoin

Should you invest in Bitcoin? My answer to Margaret, Wendy’s answer to her sons and your answer to yourself can all refer back to Mr. Buffet’s answer.

Which is exactly how I answered Margaret. My answer to her was “Yes, I am a licensed futures broker and bitcoin now has a futures contract, so technically, yes, I can trade it.”

“However, would I trade it? Not on your life. ”

Why? Because I know nothing about it. To borrow almost exactly from Buffet, why should I trade bitcoin or cryptos that I know nothing about when I can trade 12 commodities like soybeans, gasoline and (Yes Warren) Cocoa Beans that I know everything about?

Which is what I told Margaret. And is What Wendy likely told, in some form, to her sons. “It was like the day they found out Santa Claus wasn’t real.” She said.

That Warren thinks cryptos will “come to a bad ending” is beside the point. You’ve worked hard for your money. If you want to take a small portion and take a “Moonshot” on Bitcoin, like silicon valley investor Peter Theil was doing last month, be my guest. Have a blast. Just consider it casino money.


Growing and protecting wealth responsibly does not typically involve “moonshots,” at least not with the kids’ inheritance. For my dollar, I prefer the tried and true.

Costner as brilliant psychopath Earl Brooks

Costner as brilliant psychopath Earl Brooks: “You always want to invest in things people can’t do without.”


That means playing the odds. Using concepts that have beenproven over time. Applying percentages in your favor over and over and over again.

Invest in Things People Can’t Do Without

To me, it also means investing in real markets that I can touch and feel. I can’t hold a bitcoin in my hand. If financial Armageddon comes tomorrow, will anybody still want a bitcoin? I started investing in silver when I was a teenager. And you know what? I still have some of those original coins. I can still hold them in my hand. They still have a value. 100 years from now, they will still have a value. As will a pound of sugar or a bushel of wheat.

Kevin Costner made a lesser known movie in the early 2000’s called “Mr. Brooks.” He plays a psychopath (Earl Brooks) but the picture contains a timeless piece of investment wisdom. “You always want to invest in things people can’t do without. Water and cemeteries… pretty safe bets,” quips the sinister Costner.

Its doubtful Mr. Brooks would have been a big fan of bitcoin. But items like wheat, corn, oil and cotton would have likely appealed to his stoic investment logic.

In a day and age when stock values are (still) in the stratosphere and bitcoin rages across the investment sky like Haley’s Comet, investing in basic commodities that everyone needs may not make the evening news.

But it’s my guess we’ll all still be eating, traveling and dressing long after either comes crashing back to earth.

Have a great month of option selling!

Regards,
James

  1. Sagastocks Says:
    February 17, 2018 at 2:13 pm

    Excellent piece, wisely written. Thanks.

  2. One couldn’t pick better words. Thank you.

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