Crypto Selloff Gathering Steam- Be Wary of Too Aggressive of Promoters

Wall Street, like many other industries, is designed to sell you what you think you want. It is like a candy store offering you a wide variety of delectable offerings, that while tasty, might not be best for your health.  Good investments don’t need massive promotional campaigns to sell prudent investors.  Usually a paragraph or so outlining the opportunity and the financial metrics can give you a good idea of what you are dealing with.  Certainly you want to dig far deeper than that or have an expert do that for you, but you should never fall for the propaganda campaigns when celebrities are pitching you on what to do with your hard earned money.  When everyone and their grandmother is talking about the same types of speculative investments at the same time, it makes sense to be skeptical.

The 2021 stock market has been defined by Cryptocurrency and Meme stocks, such as AMC and GameStop.  There are very knowledgeable people about Crypto, which got in several years ago and have made a lot of money, but as what often happens with the market too many people follow short-term past performance and get in at very bad levels, where the losses are very large.  If one is a diehard Crypto believer, they might be comfortable riding out the storm, but when people chase short-term performance, these types of losses are hard to handle.  Those that have made a lot of money in just about anything have been willing to ride out periods of extreme volatility.  We saw it ourselves last year, when the market dropped faster and deeper than it ever had in just one month.  While that was clearly an extreme scenario exasperated by the pandemic and global lockdowns, what gave us confidence we could recover were the underlying cash flows and financial strength of the underlying businesses.  We also use a strategy with options that provides ample protection, but that protection is only fully realized as the options expire.  This is why our number one rule of investing successfully is never to panic.

As I write this newsletter, all of the Cryptocurrencies are down big from their highs.

Bitcoin $BTC: -55%

Cardano $ADA: -60%

Ethereum $ETH: -62%

Binance Coin $BNB: -71%

XRP $XRP: -75%

Dogecoin $DOGE: -80%


This is immense volatility and fortunes have been made and lost, but as is often the case, the fortunes made were generally those that got in really early.  Crypto is a very speculative asset for many reasons.  If you feel the need to participate, I’d suggest treating it as such with money you can afford to lose, similar to a Vegas gambling budget if that is your thing.  We can all appreciate the Blockchain technology and the potential in many utilities, including banking, finance and healthcare.

My biggest concerns with the space are that governments are not likely to want to cede control of their currencies and they can make things very difficult as we are seeing China and other countries doing currently.  I personally believe you’ll see them make their own Cryptocurrencies sponsored by the Central Banks. There are no cash flows, nor is there any other utility for Crypto like with what exists with gold and silver, which can be used as jewelry or as an industrial metal in many applications.  The environmental concerns are not easy to rationalize away, as the mining process uses more electricity than many decent sized countries.  Often that electricity is generated via coal or other fossil fuels, which seems a bit hypocritical in that many of the Crypto sponsors are Green advocates.  There are many Cryptocurrencies and few barriers to entry, including very little regulation.  This is a very dangerous combination, so please make sure your eyes are wide open to the benefits and risks.  It is not a game that I play personally, as I believe there are far easier ways of making money using fundamental analysis and strategy.

With that said, I enjoy seeing new technologies develop and I think we’ll find more applications for Blockchain.  In 2000, the excitement over the internet caused a massive bubble, which popped later that year.  The massive investment into the space ultimately caused a lot of great companies to emerge from the ashes, which we see still thriving today.  It is easy though to have a “high risk tolerance” when you are making money, or when the money you are investing with is not vital to your future needs.  These assets are challenging because there really aren’t fundamentals beyond supply and demand of buyers and sellers, so it is impossible to predict the floor or the ceiling.  Remember, you don’t have to play every game Wall Street does.  That is why we focus on our circle of competence, as unlike with baseball, we can let as many unfavorable pitches pass the plate as necessary before we swing.