The first major investment concept revised in 2021 is that on cryptocurrency: I do not know sufficiently that it is certainly a scam.
Crypto scepticism
I had been sceptical on cryptocurrency for a long time. Even in its early days when I first noticed reports about it. I even took a course that included block-chain as part of its syllabus. At breakfast, I sat next to people who had sold their flats to invest in bitcoins while it was worth hundreds of dollars per coin. They would now be cruising the world if cruises are allowed to sail.
Still, I held off putting any money in them. “These are speculative assets, or even a Ponzi scheme, which no rational investors should deal in,” I told myself. All my reasons told me I was right. Warren Buffett and Jamie Dimon confirmed I was right. I only lightly entertained the idea, if at all, that I might be wrong.
Beliefs diversification
Until 2020 Dec. I wrote about diversifying my investments across beliefs. If I had always been right, I would be richer than Elon Musk. I would have predicted Trump victory in 2016. Actually, I would be God. But of course, no human is always right.
I am not a believer that block-chain or Bitcoin would change the world. Neither do I believe that they will disappear without a trace five years down the road. I simply believe that they are a speculative asset class bordering on a Ponzi scheme. I also believe that no-one actually KNOWS what path this technology or asset class will take. Neither does anybody KNOW if crypto will become a mainstay of the economy. I do know, however, that financial institutions are starting to place bets. These are market players whose behaviour influence outcomes. Now they have their skin in the game, they are likely to influence outcomes favourable to their bets.
Having thus identified my belief about crypto-currency, I have a major investment concept revised in 2021. I have decided to put money in them.
Investing directly in crypto
I looked into direct investment in crypto-currency, and was directed to Coinbase. The basic infrastructure about crypto investment is the wallet. These can be hosted, non-custodial, or hardware wallets.
Hosted wallets are the simplest for beginners. You simply entrust a third party to hold the cryptocurrency for you. There is no need to worry about losing your crypto if you forget your password. However, you run the risk that the third party might default or defraud against you.
Hardware wallets are the most complex of the three. You need to buy a piece of hardware like a thumb-drive. However, they are also the most secured: you hold the crypto in your own device and you have the lowest risk of hackers getting access to it.
The middle of the road option is a non-custodial wallet. This is essentially a piece of software that you download into your computer. You will be able to directly hold your crypto in this “wallet”, on your computer. As control of the wallet now resides with you, you will lose the crypto should you forget the password. Further, if you computer gets hacked, you will also lose the wallet and crypto along with it.
Investing indirectly via stock exchanges
Having a major investment concept revised can be challenging. In particular, switching your trading platform from that which is familiar can be daunting. This is where traditional stock exchanges can ease the transition.
The 2 most common traditional stock-exchange traded vehicles with Bitcoin exposures are Grayscale Bitcoin Trust (GBTC) and the BTCetc Bitcoin Exchange Traded Crypto (BTCE). The issuers also other similar products for a few other cryptocurrencies.
GBTC are essentially exchange-traded notes that track, very roughly, the price movement of Bitcoins. Via this vehicle, the everyday Jo can get exposure to Bitcoins. There are no tax, regulatory or operational issues such as setting up crypto wallets to worry about. However, you pay dearly for the privilege. The Trust charges 2% for management expense annually. Compare this with Vanguard’s funds, which fees go as low as 0.08%. It has also traded historically at a premium to the price of Bitcoin. For example, as of 2021 Jan 15th, the Trust traded at $39.34 per share, while the value of its Bitcoin holding was $35.26 per share. This means it is trading at about 12% premium. The size of the premium has reached 20% or more historically.
Decrypt has a very good article about all you need to know about GBTC.
BTCE is an exchange-traded cryptocurrency (ETC). It is traded on both the Deutsche Börse and the SIX Swiss Exchange. It is a relatively new vehicle, only starting in 2020 August. You still have to pay 2% annual management fees. However, compared with GBTC, the physically deposited bitcoin replication of the vehicle means you do not have a pay a premium. The price you pay for the share is equivalent to the value of the Bitcoin backing the share.
ETF.com has an interview with the co-CEO of the issuer of BTCE here.
Even more round-about exposures
If, after having the major investment concept revised, such exposures are still too much for comfort, there are still other options. Traditional economy companies worried about their cheese being moved either have or are in the process of incorporating crypto in their business processes.
First amongst these is the digital payment companies. These companies help connect online or even bricks-and-mortar merchants with various financial institutions. They thus free merchants from the tasks related to directly connecting with banks.
Paypal and Square
Two examples of such companies that stand out are Paypal and Square.
In 2020 Oct, Paypal announced that it would let its 346 million users buy and spend bitcoin and some other cryptocurrencies. That was despite its boss, Bill Harris, previously calling bitcoin a scam, as did Jamie Dimon, boss of JP Morgan. Since then, Paypal’s share price has risen by about 24.5%, outpacing the increase in the S&P500 Index by about 10%. The share price performance is notable, especially since the crypto-currency did not take too well to the restrictive approach Paypal is taking. One can only expect that a more wholehearted embrace of crypto might propel its share price even further.
In contrast to Paypal’s Harris, the boss of Square, Jack Dorsey, has been a crypto advocate. The company has allowed users to buy bitcoin on its app since 2018. In 2020 Oct, Square announced it had acquired 4709 bitcoin, worth about $50 million dollars then, or 1% of the company’s assets. Since then Square’s share price has risen 36%, outpacing the growth of Paypal’s share price.
Visa and Mastercard
In contrast to the upstarts of Paypal and Square, Visa and Mastercard have been very cautious in the adoption of crypto. Visa announced in 2020 Dec that it would launch a credit card that offers bitcoin as a reward. Mastercard announced in 2020 Jul that it planned to fast track crypto adoption with a new program. We have not heard much since.
It is thus no surprise then for the differing fate of their share price movements over the past 12 months. The share prices of Square and Paypal had raced ahead by 228% and 106% respectively. That of Visa and Mastercard had actually declined by 1.5% and 0.1% respectively. During the same period, the S&P 500 Index gained more than 12.8%.
However, both are giants in the payments industry, given the scale of their operations and their reach. As such, should they eventually manage to incorporate crypto into their business models and processes, the impact could be huge. Unless crypto’s prices stage another collapse and never recover again, the payment upstarts will gain relative influence. Thus I expect the pressure to be intense on these two grand-daddies to have their own major investment concept revised.
Conclusion
The advent of zero interest rate environment and quantitative easing has been a significant regime change in the investment market. The implications of such an environment were not envisaged by academics or practitioners who had did much to further our understanding of how the investment market works. This means we are now in a world where nobody KNOWS.
In particular, nobody can say for certain how cryptocurrency might turn out five years down the road. Experts have written books like “How money got free” and “Attack of the 50-foot Blockchain” to explain how these function and what the future might be. Still, these are beliefs and convictions, and not one person knows for certain.
Given such a background, the first major investment concept revised in 2021 is that on cryptocurrency. I just have one caveat: make sure you size your bet so that even if you lose all, you would barely notice it.
