I like the below article, for its deliberate balance, and now shall search for a similar article that talks fundamentals of P&L and cashflow.
seekingalpha.com
Cryptos 101 - To The Moon Or Back Down To Earth?
SA Marketplace
Photo by thamerpic/iStock Editorial via Getty Images
By Tim Murphy
Ripple and Bitcoin and Ether - oh my! Ripple and Bitcoin and Ether - oh my!
If you had the brains, heart, and courage to dip your toes into the Bitcoin and altcoin waters, then my guess is you're feeling like Dorothy clicking the heels of her ruby red shoes and saying "There's no place like DOGE!"
But where do we go from here? 700% gains aren't sustainable - are they? Are we in a bubble? Is there really value to these? Or maybe cryptos have been misunderstood and they will be more widely adopted?
On Marketplace we have two services dedicated to cryptocurrencies and crypto/blockchain related stocks - The Coin Agora by The Freedonia Cooperative and Crypto Waves by Ryan Wilday and Jason Appel. I asked them five burning questions I have about the space that I figure many of you have as well - and I asked for one under-the-radar pick from their service. To continue the Wizard of Oz theme, I hope their answers help pull back the curtain a bit and take you down the yellow brick road of the crypto investment future. Enjoy!
1. Let's cut to the chase - why do you believe cryptocurrencies are a good investment?
The Coin Agora: Cryptocurrencies is a mostly misleading name (the second half of it) and I think that's drawn unnecessary ire. Think of the field not as a set of currencies (competing with USD, EUR), but instead as thousands of projects built on a new technology (blockchain). Think of these projects the way that the late 1990s started the wave of (now) billions of websites.
And in that same way - some of these projects are good but most will fail. They could fail either by originating with a bad business plan or not executing on one. As with any new technology, blockchain investing ("crypto") has been fueled by speculation and its rise has created some uneasiness and volatility.
And yet we're here more than 12 years since the Bitcoin ( BTC-USD) white paper and that coin in particular has proven to be a popular place to park net worth or corporate balances and hold. Perhaps no chart has shown this better than Coinbase's S1 share which showed the continuous rise of institutional investors using their services.
And that's just Bitcoin - where it all started from and where proof-of-work, well, proved itself to be a real incentivization mechanism for de-centralized transaction confirmation. There's a lot more innovation in the space happening now.
And I think Ethereum's ( ETH-USD) rise in transaction volume and coin price is as important as Bitcoin's this year, which I'll get into below.
Crypto Waves : No other asset class offers the upside potential that crypto has, plain and simple. Although there's much speculation, it's truly unknown how cryptocurrencies will develop in the coming decades. And even without that knowledge, as an asset class, it has arrived. BTC has outperformed every other asset class in recent years.
At times we consider cash, as in the US dollar a place to park money, in times of deflation, debt crisis, or poor liquidity. And, yet the US dollar is on an endless cycle of debasement, and doesn't yield cash flow, risk free, without that yield being smashed by inflation.
Many run to gold due to the above concern. It's scarce and cannot be debased by government decree. Yet it's not very portable, not very liquid, and doesn't yield any cash flow.
Bitcoin has a transparent inflation rate, currently roughly 1.76% and declining, and a supply cap of 21 million. Bitcoin also is infinitely portable by digital means, highly liquid, and can generate a yield between 5%-10% with some institutions. This makes it a superior store of value above cash or gold.
On top of that, Bitcoin, over the last four years, has outperformed all asset classes on a risk-adjusted basis despite its volatility. A trader who captured its volatility would have done even better.
After being in this asset class for nine years, and seeing the recognition and adoption of these characteristics, I have to ask why everyone doesn't have at least some exposure to this asset class. Each individual simply should decide how large or small that exposure is.
Are all cryptocurrencies, like Bitcoin? No. Many are speculative vehicles, though there are many, like Ethereum that are helping to build an entirely new financial industry on decentralized principles which is worthy of further development.
2. A common argument is that cryptos lack fundamentals - how do you respond? And what is your approach to finding opportunities in the crypto market?
Crypto Waves: History... BTC continues to attract demand and produce higher highs and higher lows in its various cycles. That it lacks fundamentals has not stopped BTC, ETH, and a variety of alts from having large cyclical bullish runs, and in BTC's case, a sustained uptrend that's now 10+ years in the making.
Regarding fundamentals, it's unknown as to why the collection of market participants that comprises the cryptocurrency market wishes to invest. Are they using it as a store of value? Are they speculating? Is there some potential that has not been publicly well identified? Is it really any different than gold, with regards to the claim that it lacks fundamentals?
As it is, there's little consensus throughout the investment world about which fundamentals actually matter. In some asset classes it is yield. In others it is price-to-earnings ratio. Others it's year over year revenue growth and in others, free cash flow, and in others it is book value.
If we're going to criticize Bitcoin for lacking fundamentals, can we not make the same criticisms of gold? When was the last time gold produced an uptick in its price-to-earnings ratio? Our approach to finding opportunities is 100% technical. We identify chart patterns that convey strong directional trending sentiment, that allows us - with conviction -- to take positions with favorable risk to reward ratios, positive expected value, and clear invalidation points. We let the market tell us when we're wrong, and the use of Elliott Wave gives us clear parameters for selectively taking risk.
We also pull from the school of behavioral economics when discussing the value of crypto. This school of thought says that value is driven by utility or "usefulness." In this sense crypto is starting to show immense utility, whether as a store of value in crypto, as a means to settle international payments faster than legacy systems, or as a means to run a decentralized economy. In the case of Ether, that economy is now in the 10s of billions. Those are just a few areas of crypto's developing utility.
Value locked in Decentralized Finance (DEFI), most of which is Ether or tokens running on Ether.
Source: DeFi Is Now a $100B Sector - CoinDesk
The Coin Agora: I don't argue on the fundamentals point. It's not the same asset class as others that have histories and fundamentals (though even those can be thrown out, like with GameStop (NYSE: GME)). And honestly not enough investors truly understand the finer points of equity investment to begin with, there's something potentially easier about buying BTC or ETH on Coinbase and using it if you'd like.
That being said, the amount of data available in crypto is staggering and that's going to be a real narrative over the next few years. Sites like Glassnode are going to have deep insights into trading activity because all transactions are available to see on the blockchain. Kraken, other exchanges, and investment shops are all putting out more in-depth reports on trading and wallet volumes. The time will come with "smart" investing in these beyond technical analysis.
My approach is certainly watching those - I think there's immense value for instance in the percent of wallets holding a coin without activity over a period. People are holding and massively decreasing supply in a coin like ETH as seen here.
But I write in my service all about projects. I only want to invest personally in projects I see a real value in and a tactical purpose for being a coin holder (either a yield, colleratilized value, or utility). Even if some are still in the speculation cycle like Cardano ( ADA-USD), I will seek those out that seem to have a clear roadmap, a good leadership team, and good tokenomics. In this way, it's not so much different than stocks, there's just some more noise and risk.
3. There is talk of "Flippening," where the valuation of Ether takes over Bitcoin, meanwhile Dogecoin ( DOGE-USD) is going to the moon with the help of Elon's tweets and SNL appearance - is Bitcoin yesterday's news? And what are some specific crypto opportunities that lie ahead?
The Coin Agora: Let's start with Dogecoin, which I advise my marketplace to watch, not as an investment (though that's absolutely a personal choice) but just as a bellwether. Its market cap has topped $60 billion (over $80b at peak) and that money is NOT going to leave the crypto market in mass. Someone that bought DOGE a year ago is not going to sell their coins in order to buy into Ford ( F) or Chevron ( CVX) I'll tell you that. So where is the money going to come back to? BTC, ETH, other "altcoins."
On the Ethereum side, I think the "flippening" idea has subsided as a meme or talking point because crypto investors, at large, started seeing the two coins as complementary. That wasn't the case in 2017, it felt like a winner-take-all situation. But now? I own BTC and ETH. I think most crypto investors do. I barely touch my BTC. I use ETH weekly if not more often for various deFI buying. Others are using it for NFTs (or FLOW or WAX), and Coinbase announced it will start letting holders stake ETH at 6% APY which I think is going to be a very, very enticing reason for many to hold.
I'm more bullish on the growth of ETH in value than BTC, for what it's worth, but I'm writing about owning both and I do not think ETH growth will hinder BTC valuations. If you expand to think about the institutional side of this, companies may choose to hold BTC on their books as an asset, but many will buy ETH for corporate or enterprise smart contract deployment.
And if you think that last sentence sounds like science fiction, then that makes me all the more bullish on ETH because there's still so many people to have their lightbulb moment on its technology.
Crypto Waves :Bitcoin is hardly yesterday's news. In the bull run at the last quarter of 2017, as well, many alts tremendously outperformed Bitcoin. In the subsequent bear market, most of the alts got absolutely crushed, many of which have yet to retrace sizable portions of their drop from the 2018 high... let alone exceed their early 2018 high water marks.
I'm not ready to say BTC is old news until I see several alt coins outperform Bitcoin through a prolonged bear market.
Historically, at the beginning of a bull run, we tend to see BTC run ahead, and at the latter portion of the bull run, we see outperformance in alt coins as investors likely roll some of their profits into their favorite projects. In 2017, there was such unbridled enthusiasm about a lot of these projects, many of which have petered out, or the coins have totally collapsed.
Regarding DOGE coin - and really any alt coin for that matter, with the exception of ETH - none have proven yet to be investment grade, but I see them as phenomenal swing-trading instruments. I suspect at some point, we will see some projects emerge that maintain relevance through several market cycles.
4. There has also been a lot written about cryptos being a hedge against inflation, what are your thoughts?
Crypto Waves : It's a weak argument, speculative at best. While that's currently en vogue as a topic of conversation given the coincidence of cryptos having a strong year amidst strong inflation expectations, there's no evidence of it being effective as a durable hedge against inflation. And so, while some market participants are currently buying it as a hedge, I can think of several reasons why it wouldn't be.
What happens if we go into a huge bear market in cryptos in a month or six months from now? Are we to take that to mean that people are no longer worried about inflation? There likely are investors that are using it as a means against inflation, but the quality of the hedge is totally untested. At its core, the concept "hedge against inflation" indicates that some asset provides "safe haven" by storing the value of the funds used to purchase that asset. If you bought BTC in December of 2017 as a hedge against inflation, how well did it store your value over the subsequent year?
Essentially, it would be very premature to consider an asset that has exhibited numerous 80%-plus drawdowns in its history an effective and durable hedge against inflation. It's hard to make an argument that such volatility offers a safe haven from debasement.
The Coin Agora: Yes, it can be that. This speaks to the expansiveness I see in "crypto." Some people can and will buy and hold Bitcoin as a hedge on U.S. and global inflation. And the hard limit of 21 million coins will likely serve that purpose. Ethereum is talking about deflationary token economics over the next few years, which I know is exciting a segment of investors.
But to say that's "all" it is making the narrative too small. There's just as much call for inflation hedging amongst investors as those wanting to invest in a supply chain project like VeChain ( VET-USD) or Hedera (HBAR-USD) which is an investment in emerging technologies the way that investing in IBM was putting money behind a growing market opportunity for computing.
I think from the investment side, the inflation hedge narrative is one that sticks because it can simultaneously explain why Bitcoin can quickly rise to above $50,000 and also why it stays there.
5. What are the current and future risks of investing in cryptos and how can it be managed?
The Coin Agora: Look, there are a lot of risks here. DeFi is an amazing enablement tool but it comes with very sincere risks for investors, especially those trying to cash in on absolutely unsustainable growth rates. So please be careful - the regulatory guardrails for regular investors are obviously not in this space yet.
Trust and security in crypto are going to be a huge movement and market opportunity. The more these assets grow the more investors will pay for security. New companies are popping up in insuring crypto assets (Nexus Mutual), dynamic wallets that don't require seed phrases, and more to help with this. This will be a flywheel of sorts - the more valuable the assets are, the higher the need for security. If the security can be legitimate, the more people may invest in these emerging assets.
Crypto Waves : Anyone who invests in crypto has to embrace the volatility - while it's the greatest risk, it's also the greatest opportunity. Without this feature, cryptocurrencies would not offer such wealth generating potential. Risks can be managed by taking profits and setting stops. Considering that cryptocurrencies are no stranger to 80%-plus corrections and 100x rallies, managing risk is essential. While the current state of the market is very kind to #HODLers, remember back to 2018.
If you listen to leading Crypto podcasts these days, it's commonly stated that this is a new phase for crypto, particularly Bitcoin. In this phase, sometimes called a super cycle, Bitcoin will not see another large decline of 75% as it did in 2018 and previous bear cycles. This is false. The same market characteristics that create a 300 to 500% return in Bitcoin over the course of a year will create that decline. Bitcoin, while now very liquid, is a tight market. It's also a market with heated sentiment characteristics. Just as few chasing Bitcoin higher can push it to immense return, it just takes a few exiting in size to take it down fast.
At least in the US, we do not see the government as a risk. We've seen a very fair crypto policy develop. Of course, our current volatile political environment may change that fast.
However, we hold each crypto as an experimental project. There are thousands of projects looking to take out the market cap leaders like Bitcoin and Ethereum. Just as companies that seem embedded in society often come to nothing, many cryptos that seem here to stay may give way to new leaders in the future.
6. And lastly, can you share one idea from your service for our readers that you have high conviction for?
Crypto Waves : Our coin pick is Fantom ( FTM-USD). At a price of 76 cents, it's a bargain compared to our ultimate target of $12.70. We do not evaluate trades based on the altcoin project or functionality. Rather, I read charts through our method, the Elliott Wave theory, and Fibonacci Pinball. In order to get to $12.70 it will have a few key milestones. First, it will need to get to the next swing target at $2.30. Zoomed into my micro chart we can see that we do have a smaller setup aiming at that level. This setup is valid as long as over 25 cents. After the $2.30 to $3.4 region, we can see a large correction in wave (4) to 41 cents. Finally, provided 40 cents holds, we should see an amazing wave (5) from the 41 cent region to $12.70.
The Coin Agora: Our service is built to find great altcoin projects and our minimum growth from a pick this year is 34% since February publishing, while BTC is up only 6% in that stretch. Several of our altcoin picks are up over 200% in just three months.
VeChain is still my absolute pick but I've covered that on Seeking Alpha previously ( here and here). I'll offer another today: NEXO ( NEXO-USD) which is a de-centralized "bank" of sorts which offers loans (based on crypto collateral) and yields on assets kept on its platform. Currently, BTC and ETH holders can earn up to 8% annually in their coins and stablecoins like USDC and USDT top out at 12%.
In order to get these high rates, holders must keep a certain percentage of their holdings in NEXO's native token, giving an instant use and hold case (again things I look for in great projects). NEXO also pays out an annual dividend in August for holders, so I think we'll see demand continue to grow through the summer.
Last month, NEXO announced it had over $5 billion of assets under management (from under a billion to start 2020) and its competitor BlockFi just raised a $350 million Series D, so you know there's interest in this area.
Disclosures:
The Freedonia Cooperative: Long BTC-USD, ETH-USD, ADA-USD, VET-USD, HBAR-USD
Ryan Wilday and Jason Appel: Long BTC-USD, ETH-USD, FTM-USD, DOGE-USD
Tim Murphy: Long BTC-USD, ETH-USD, DOGE-USD |
