So Benj is avoiding crypto. For those who know how he invests, that is not surprising. He likes “old” so to speak. For example, he does not invest in any stocks that have not been listed for at least 10 years – thus new and exciting picks are not in his vernacular.
Why not? Well 45 years of investing steered him to established companies, avoiding some of the blowouts.
This meant that when marijuana stocks and tech companies were raging, scads of people were making big bucks, while he was not. He remembers vividly when his handyman’s son came over, his smile displaying the money he was making. Alas, a year later, the tears of joy had turned into tears of sorrow.
In Benj’s household, his eldest lad Caellum is reaping the rewards of his investments in crypto and wondering why his old dad is not joining him. Well, umm ….
Benj does not agree with the late Charlie Munger and Warren Buffett. Charlie said, “Crypto is stupid ‘cause it’s very likely to go to zero.” He has compared trading it with “trading turds.” Well, who says that you cannot get a good deal if you are on the right side of a turd trade?
Warren states it this way. “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.” He has further said, “I wouldn’t pay $25 for all the bitcoin in the world.”
Benj hates to disagree with these top-of-the-line investors but $25 for all the bitcoin in the world seems like a staggeringly great deal. Where it gets difficult though is establishing a value for crypto. There simply is not a reasonable way to do that in his mind.
Of course, that is generally the case with investments. While many people have their formulas for valuing stocks, one has yet to crack the code of a perfect method.
Benj often thinks of one of his professors who pushed the “perfectly efficient market” hypothesis suggesting there is almost no hope in besting the market as all stocks are accurately priced. Benj thinks of the day in 1987 when the stock market went down 22.4 per cent. Hey, that cannot transpire in a perfectly efficient market, no matter what one smokes.
Back in the day, circa 2018, Benj would appear regularly on CBC’s On The Money with Peter Armstrong. Crypto was often a topic when it was far less known and very exotic. Of course, that has changed, it has moved much more into the mainstream.
One of Benj’s favourite manias was the Dutch Tulip craziness. It got to the point where a single flower sold for more than 10 times the annual income of an artisan. Yes, it would have bought a lot of wooden clogs, enough to transport believers to heaven. Alas, too many citizens got caught in the collapse of 1637, when the bloom fell off the tulip.
This is like a kissing cousin to Ponzi schemes, a fraud where earlier investors are paid money from the funds of more recent stakeholders. Think Bernie Madoff who bilked his followers out of about US$20-billion, or the DC Solar scheme.
Crypto has no real worth, except the value that the public places on it. Unlike a stock or bond where an investor can set a numerator and denominator (e.g., a stock’s price-to-earnings ratio) there is no such denominator for crypto.
People often say that about gold, but it is used in the medical, industrial and automotive industries, among others. There is at least beauty attached to it and loveliness has value. Like most things, it has worth based on supply and demand. Often when it goes up, demand increases as people do not want to miss the boat. Aah, the reality of FOMO.
Remember, cryptocurrencies are relatively new, circa the 1980s, with bitcoin’s inception in 2009. Now, they have a valuation of about US$2.86-trillion, hitting records recently, with bitcoin comprising about half of that. Between the new crypto ETFs that are popping up like weeds and the coming bitcoin halving, it has surpassed its record high, eclipsing US$73,000 per coin this month.
Talk about creating something from nothing! My bet is that it will go up further, offering people an alternative investment and excitement. And after it climbs at some extremely fast rate, the general public will get sucked in and blow their brains out.
Meanwhile, the trading volume grows dramatically. The other week, nine bitcoin ETFs in the U.S. reached $3.2-billion. Yes, that is real money.
Benj always sets an initial sell target when he buys a stock. This grounds him and helps to ensure that he has something that seems like a realistic target price. He has asked his lad, Caellum, if he has a sell price on his bitcoin. He does not and the elder understands that this would be difficult to set. The history is so short that it makes it a challenge to estimate the future from the past.
The chief executive officer of Ark Invest, Cathie Woods, suggests that bitcoin could reach US$1.48-million by 2030. You read that right. She has made some great selections in the past but also some remarkably bad ones and Benj scoffs at this forecast. Yes, scoffs. But as with most investments, it is a smart idea to take some money off the table when the price has skyrocketed. Of course, the question is when?
In the crypto space, this is particularly important. Numerous enterprises in the field have gone bankrupt including BlockFi, Core Scientific, FTX, Genesis Global Capital and Voyageur Capital. There are various others, and the list will continue to grow.
Fortunately, Benj’s son is wise enough to know not to put too much money in any asset, never mind a highly speculative one, so his holdings were purchased making up about 5 per cent of his net worth. He started with 10 coins in the space to diversify, that has been pared back to two, bitcoin and ethereum.
As Caellum says, “Many factors will affect how valuable crypto and bitcoin will be, specifically its accessibility, adoption, scalability and regulation around it as a currency as opposed to just a store of value. How these change and evolve in the coming years will be interesting to see. I think there is more upside as it gains more adoption.”
So, does cryptocurrency have tangible value? Well yes and no. As long as people choose to believe it does, it does. And as has proven for thousands of years, people can believe in something that they cannot see and cannot touch.
Yes, in some ways crypto is a religion. And there are few things more exhilarating than belief.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter