Cryptocurrency
Wednesday, April 14th this week was the direct listing of an SF company in the business of storing/trading/managing cryptocurrencies mainly Bitcoin. Coinbase (COIN) went public this week. We have been trying to understand what cryptocurrencies are and if and how they fit into portfolios. Although we have read a great deal, I have to admit that it is a hard reality for me to grasp. I know certain information:
- Blockchain computing is the mechanism used to “mine” cryptocurrency.
- This involves linking a large number of separate servers and computers together to establish independently verified data with unique identifier codes.
- It is created with the purpose of exchanging value independent of fiat currency which is backed by the good faith and credit of governments
- Cryptocurrency mining, trading, and maintenance takes enormous computing power and uses equal amounts of energy
- The price of bitcoin and other cryptocurrencies has increased dramatically since the beginning of 2021
- As an investment, cryptocurrencies are very volatile, partly because they are very thinly traded Long term holders or LTH of bitcoin hold 95% of the bitcoin available
- A number of investment firms have applied to create cryptocurrency ETFs
- Other than holding a cryptocurrency directly in a “wallet”, there are a couple of closed-end funds that you can purchase now in the market but they are very volatile and have very high expenses.
- Coinbase IPO via direct listing means only current holders of stock-i.e. employees and funders-can sell directly into the markets. As they sell those shares, those same shares become available to others to purchase on the open market.
- The estimate of share price value by Nasdaq issued Tuesday was about $250/share. The following day, the price opened well above $300/share and bumbled up and down throughout the trading day.
- Analysts speculate that shares could go much higher after trading begins as the enterprise value could be $100B placing it in an elite group; one of the 85 highest value US companies.
- Analysts are finding cryptocurrency hard to assess as far as an asset class. Some say it is a hedge against inflation similar to gold. Major investment firms are strategizing how they can get involved in the market.
Prominent economists fall all over the map with the legitimacy of cryptocurrency from viewing it as a bubble to viewing it as a legitimate and growing means of exchange for value. Major corporations such as Tesla are buying and accepting bitcoin as payment for goods and services. Square, Paypal, and credit card companies are trying to figure out what to do in regard to crypto. Even the Federal Reserve is studying crypto as well as something called digital currency which has no physical form. China has outlawed crypto/digital currency and closed down mining operations.
On the ground, crypto has a reputation of being used to launder money, in drug transactions and other criminal activity because transactions are hard to trace.
The growth of crypto could also indicate a declining faith in fiat currency and governments in general. It could be a symptom of the general unease and loss of confidence in government institutions.
All in all, it is indicative of a general concern with government institutions, the Federal Reserve, huge budget deficits, and debt. Volatile times for volatile assets and securities.
This website is informational only and does not constitute investment advice or a solicitation. Investments and investment strategies recommended in this blog may not be suitable for all investors. SAS Financial Advisors, LLC and its members may hold positions in the securities mentioned within this newsletter.
