Making bank, breaking banks

Is the financial machine broken?

It would be impossible to look at any crypto news without looking at the broader economy and what is driving the smaller cogs in the machine.

Globally, interest rates are at all-time lows, bond yields are tiny in most countries and negative in others. If you thought that paying an account keeping fee of $10/mth for allowing the banks to hold your money was ridiculous, then you are not going to like negative-yield bonds. Imagine depositing $100 000 and when you go to get it back the following year, it is only $99k. Then you look around and realise that prices of goods and services have gone up, so you have lost capital as well as purchasing power. Ouch! It seems crazy but that is the reality in several countries.

At the same time as bond yields and cash interest rates are heading lower, stock markets are heading to new highs. That may sound good, until you realise that the economies and underlying earnings of most companies are at record lows.

People who are buying stocks in companies with very low earnings are speculating (read: gambling) that the stock price will increase, even when the fundamental analysis shows no reason why it would go up. Recently, people have bought Hertz, even though the firm had announced bankruptcy. For those who are unaware, when a company goes bankrupt, it often pays back its debts at just pennies in the dollar, and investors most likely receive zero. These are crazy times indeed.

Where is the smart money heading?

There are still some undervalued stocks, and the companies which have been doing it tough (but not filed for bankruptcy) may recover well. Whilst the silly money goes into speculative stock with low earnings, hoping to quickly sell it before it goes down, some of the wiser investors are playing a longer game.

Corporate debt may pay a higher rate than government bonds, compensating investors for their higher risk. This may be likened to lending money to someone for consumer spending (eg. A credit card, which may attract 10%+ interest) versus lending money to someone for a house (a mortgage may be 3% interest).

If the person cannot pay back the loan, you as the lender may be able to seize the underlying asset. In the case of the credit card, it may have been used to buy food, or furniture, so you could expect to get back nothing, or only a small percentage of what was paid. In the case of a house, even in a bad market, you could likely receive at least 50-70% of your money back. It is still bad, but not as bad as the alternative.

Those investing into government bonds with a negative rate, may think that having 95% of your money is better than losing potentially 20% or more in an alternative investment.

When cash is no longer king

Some experienced investors are hoarding cash, waiting for the big opportunity to jump in and buy good stocks at discount prices. This is a strategy which has worked in the past, and those who “bought the dips” after the 1987 crash or after 9/11 may have enjoyed some good profits for taking a risk and buying cheap. Warren Buffett may be the king of opportunistic investing; he is currently sitting on an enormous stockpile of cash and biding his time.

Although media pundits may frequently say “we are in unprecedented times”, there are others who draw comparisons between 2020 and the Great Depression, or the 1918 Spanish Flu. In some of these past scenarios, stock market investors may have lost up to 90% of their money, and others bought stock at large discounts. A smaller subset of investors bought into scarce commodities and did very well.

During the Great Depression, gold prices almost tripled between 1929-1933. When the USA went off the gold standard in 1971, gold prices tripled again. After the 9/11 2001 crash, gold prices quadrupled. After the GFC1 in 2008, gold prices also tripled. Yes, there were pullbacks after each climb, and you would have had to time your purchases perfectly to pull off a 400% gain, but even if you mistimed it and only doubled your money in a couple of years, you could still feel good.

It’s all about the base…

The world monetary system used to be based on gold, but nowadays it is all based on trust. As governments around the world accrue more debt and experience a drop in income (GDP), trust in governments may be at an all-time low.

In recent weeks, it has come to light that some Chinese were just pretending to have gold. So far, 83 tonnes of gilded metal, reportedly worth billions, was discovered to be just gold-plated copper. This revelation obviously caused a shock to the markets.

It is not only the bullion holder who loses money when his cache is revealed to be almost worthless. Investors who backed the bank who lent money to the frauds based on their “gold” holdings have also lost, and investors who borrowed money from the unfortunate bank to create real estate developments will also be disadvantaged.

For millennia, gold has been a global monetary standard, and when its value is debased, tragedy ensues. As some may be aware, the Chinese character for ‘crisis’ is the same as the character for ‘opportunity’. There is always a boom on somewhere…

Enter the crypto

It is rare for gold to be faked, but not unheard of, as with the Chinese story this year. Some insiders claim that some US gold is actually gold-plated tungsten, but this has not been confirmed. Bitcoin has a far shorter history than the precious metal, but is often spoken of as ‘digital gold’.

Bitcoin is a commodity which is, like gold, is in short supply, and holds it value due to its rarity. Unlike gold, however, bitcoin cannot be faked, as there is an immutable blockchain which verifies and records every transaction. If there is a whiff of fraud, the fraudsters can be identified, and the blockchain rolled back and repaired.

There are some of a certain age who will always trust gold and not trust bitcoin, yet the boomers are aging and dying, whilst the next computer-savvy generation is growing. Aside from being “unfakeable”, bitcoin has an advantage in that small amounts can be readily accepted for small purchases, and large transactions can occur in seconds, across borders.

Obviously, major world governments are still run by older bankers, who are more likely to adopt gold as their monetary standard. Yet there are some who speak of national currency backed by bitcoin or another cryptocurrency. The Chinese already use a digital currency to pay government employees, and rumours abound that Germany may soon follow suit, having some of its national currency backed by bitcoin, not gold.

Digital gold rush

Australia’s own Perth Mint claims to be the first to issue a cryptocurrency which is not only backed by gold, but 100% government guaranteed. Obviously, there are other commodities aside from gold which can back a currency. Venezuela trialled a petrodollar. It did not work for them, but they had a go, so you have to give them credit for trying. Maybe next time?

According to the Fed, US dollars are backed by the “full faith and credit” of the US Government. This is fine if you trust the government, but many do not trust it completely. Governments have come close to bankruptcy before, have occasionally failed in their obligations to lenders, and sometimes, the government has forcibly repossessed assets from its citizens, to prevent its own economic collapse. The US government politely called it “Executive Order 6102”; the people referred to it as “the Great Government Gold Heist”.

US citizens were required, under penalty of ten years in prison, to deliver all available gold to the government during the later days of the Great Depression. The government paid you $20 per ounce so it could rebuild its stockpiles and issue more partially-gold-backed paper currency. When citizens wanted to buy their gold back, they were charged almost double, $35/oz, a nice profit for the government who was no longer close to going broke… for a while, anyway.

History may not repeat, but it echoes…

Early bitcoin owners were living in tumultuous times. In 2009, post-GFC, many banks had gone broke and several governments looked likely to follow. The stage was set for the creation of a currency which could not be inflated, controlled or repossessed by any bank or government. Bitcoin was touted as “honest money” in that nobody could make changes to it nor diminish its value by excessive printing.

Although it is observable that bitcoin and other cryptocurrencies will often drop when stock markets drop, this is also true of gold. In the early days of the 2020 pandemic, gold prices fell sharply, along with stocks, before starting a recovery. It seems that when panic abounds, panicked people may sell ‘everything’, before later realising that some assets are more precious than others. Gold ounces dropped from around $1650 to almost $1450 in early March 2020, before bouncing back to end the month where it began.

As the pandemic goes on, the gold price has been edging ever higher, up almost 30% in the past six months. For its part, bitcoin is up almost double since its March lows, and around the same level as it was in January. That is an excellent effort for a newly-created commodity, in that it has held its value through the so-called ‘unprecedented economic collapse’ of 2020.

Who’s backing whom?

Whilst gold and bitcoin are valued by their scarcity, stocks and bonds are usually valued by their underlying earnings. We have seen some big companies drop dramatically during the Covid19 Crisis, and cryptocurrencies are not immune.

Projects with a winning formula to make money, save money or save time are clear winners, whilst those with curiosity value or long promises may lose.

One of our earliest investments, PowerLedger, dropped from $0.10 to $0.03 in early March, and is now back to its old price. This shows the utility and reliability of some projects which provide value to users. There are many coins which do not provide value, functionality or advantage, which is why it is prudent to use the C.O.I.N. system when choosing to invest.

More adoption

In the past year or two we have seen more institutional adoption of cryptocurrencies, with many more wallets and exchanges to choose from, a handful of crypto credit cards, some with rewards programs, and big banks getting into bitcoin.

More recently, international financial behemoths such as PayPal & Venmo stating they would offer facilities to buy and sell cryptocurrency. It is also interesting to note that the bitcoin stored on exchanges has reached a 13-month low, according to Glassnode research. This suggests that the majority of bitcoiners are choosing to hold, rather then sell.

Whether HODL-ers are expecting to see a big price rise due to further economic downgrades, whether it is merely an expectation of demand increasing, or whether crypto may be a safe place to store wealth away from inflationary forces, nobody has a crystal ball. There are possibly as many motivations for HODL-ing as there are wallet-holders. Feel free to share your motivation with us. We would love to hear your views on the future of the market.

How did we go this month?

Things continue to look sunny for those in cryptopia for the longer haul

  • Binance coin up 137%

  • Budbo up 183%

  • ChainLink up 415%

  • Celsius Network up 1098% (yes, 10x)

A few coins, such as Ethereum are still down from their heady days. We continue to monitor the best ones, looking for opportunity and future-use case scenarios. With the creation of “wrapped bitcoin” on the Ethereum network, there may be an increased demand for interoperability, BTC/Eth smart contracts or more. It is still very early days in the cryptosphere. Nobody can predict where markets will go, but we trust math more than governments, and we go along for the ride.

BOS NAV 30/06/2020


BOS Price 32.0874