Bitcoin Guide: Part 8 - Is Bitcoin a Risk On Asset or is Bitcoin a Risk Off Asset?
Many investors think incorrectly in our opinion in ‘Bitcoin versus the dollar’, or simply of it as ‘Bitcoin instead of the dollar’. We think investing in Bitcoin is not binary. It is a growth asset in its own rite. Many investors incorrectly think of it as only good for a hedge asset. We do find it makes for an excellent uncorrelated hedge asset. However, most hedges typically don’t consistently outperform the wider markets returns in a variety of conditions, they are supposed to mitigate downside loss, not give extra risk adjusted return to your portfolio. So, thinking of Bitcoin only as a hedge might not be the optimum portfolio strategy, particularly if you’re young and intend to follow our Hold On For Dear Life (HODL) strategy, which we greatly advise over getting fancy for those new to crypto. Investing in Bitcoin is hard without our tools. Despite the often infernal response we can receive from the notoriously cantankerous Bitcoin community, we maintain (and so does the data) that despite the previously observed counter-cyclical protective characteristics Bitcoin has had in the past, it is 100%, firmly and indisputably a risk-on asset. Many people buy Bitcoin for an emotional reason, or perhaps as a political statement, but if you’re still thinking of it that way we urge you to stop. If you’re doing that, it is fine, but that’s not how your supposed to treat investments. We have firm rules of when to add to your position and when not to that will help keep your cost-basis low to gain exposure in your portfolio in the most quantitively driven way that is available to individual investors. Perhaps US monetary policy and the prospect of a future of Modern Monetary Theory makes you just about as mad as anything else in the world. That’s not a reason to invest in Bitcoin, sorry, it may have been in the beginning but it’s well passed time to stop considering this high-performing asset a toy or political statement. Political philosophy is not investment strategy, and we want to help make this incredible feat of computer engineering work for you and your portfolio. Let us help you. You won’t regret it. We think it is highly unlikely that the Federal Reserve or fiscal authorities will blow up the dollar’s reserve currency status anytime soon. We pay a lot of attention to debt markets since equity, being junior in the capital structure tends to follow bonds. We constantly watch out for issues that could cause market panics, like potential negative interest rates, but as of now we see equity markets and the policymaker support of them on good and stable footing. Part of this is the natural tendency of the reserve currency to be the asset investors prefer during flights-to-safety. What this effectively means is that the United States gets enormous capital inflows whenever markets are bad or uncertainty is high, even during the 2008 Financial Crisis which was largely a result of abuses and regulatory oversights within its national financial system. Another reality that many who make investment decisions off of political beliefs or apocalyptic predictions should remember is that many foretold that Japan’s Central Bank would surely not be able to operate effectively at the Debt/GDP ratio that the world’s third largest economy had. These predictions were wrong and BOJ showed Central Banks can defy gravity, at least for a time. Tesla was considered a risky, millennial stock with a valuation way too high. It was also singled out in the 2012 election as the premier example of lousy government investment sense. The stock is a perfect example of an asset 'of the future' being priced in the 'markets of today.' We believe Bitcoin is one such asset, but because of unique characteristics it possesses, we understand the upside could significantly exceed what is traditionally available to investors in equity markets. That being said, we typically recommend that investors only comprise 1% to 2% of their total portfolio in cryptocurrency assets. Within the crypto-class, we are currently OW on blue-chip Cryptos, including investing in Bitcoin. TSLA was dead money for a long time despite consistently improving sales, production and other key metrics. If the fundamental rules of stock valuation were the only thing driving price, then it should have been going up in line with those metrics. What was far more important for TSLA was when it would meet certain thresholds that would make it an appealing addition to the portfolios of Russel 1000 money managers. Many analysts and others wrote off the stock and management strategy as departed from reality, and in a way it was, it was departed with secular realities of the past. This can be hard for markets to spot, it may be a good predictor in other ways, but markets and investors often miss transformational moments. A lot of people speculate the crypto institutional adoption is just around the corner. We think you should listen to us on this rather than other sources. We specifically service over 200 major institutional financial clients and we happen to know for a fact that they are constrained from participating in a way that many people theorize until the crypto market is much bigger. We estimate that the crypto market still has a long way to go and needs to increase by about ten-fold in size before major institutional adoption comes. However, when this adoption does come, we think that Bitcoin’s price action will be similar to the recent parabolic moves upward for TSLA, or the long upward slog of the best growth stocks on the market. We think of Bitcoin as a major growth investment that will not replace currency, although it will for some transactions and in some communities, but what it will really do is create a lot of economic efficiency and replace a lot of the monopolistic services banks force customers to pay for. And An Emerging Market Play? Remember when BRICs were all the rage? We think investing in Bitcoin is similar. A basic tenet of economics is that capital flows from more developed economies to less developed, in many cases, because of something called the ‘catch up effect’ which essentially means capital will have higher returns, and will be more productive at of course the cost of greater risk, in developing economies compared to their more developed counterparts. This is why the first to brave the litany of risks that come with such investments often get wiped out or rich, and often not much in between. Certainly, wild swings and coup d’ etas give investors more heartburn then your typical plain vanilla ETF and have always been at the riskier end of the spectrum. We believe Bitcoin is literally an extension of the digital economy. Like many emerging market investments risks are plentiful and attention grabbing but returns and the ability to HODL made many bold investors very good, above-market returns. We believe this analogy captures our attitude toward Bitcoin as an investment and we would love to help you get exposure in the best way possible. Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? < Previous
Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact
The fundamental valuation model we created for Bitcoin suggests that 2020 will be a good year. Halving events are subject to a lot of opinions and speculation, but we are unequivocal that it is bullish for the medium and long-term. Investing in Bitcoin will require you to understand what the Halving is. It is not when the price of Bitcoin cuts in half, it is like mining gold supposed to mimic how mining a commodity increases in cost over time. This is why Bitcoin has halving built into its code, it reduces the mining reward which ensures continued scarcity. This is one of the complexities of investing in Bitcoin. We also do a lot of analysis on the supply side. We find it can help make the conceptual connection from one investment class to another, because after all, although Bitcoin’s origins, uses, and history may be cloaked in mystique and notoriety at the end of the day it is a supply and demand asset like anything else. We calculate that the available supply to the market will be significantly diminished leading to upward price pressure. This is the thrust of our analysis. We genuinely love to provide analysis in such a new and exciting market. If you’re a trader and you like to time the market, we’d love to help you though we don’t advise it for beginners. Timing the market for Bitcoin correctly is very hard and if you sell at the wrong time, even if you buy shortly after you can miss out on the bulk of your potential gains. We’ll help you avoid making that mistake with our easy-to-follow, actionable rules. Don’t invest in Bitcoin without our actionable tools and analysis. Bitcoin is the most prominent of all cryptocurrencies and for investors new to the space, it is the easiest to invest in. Over the last few years the market infrastructure has significantly developed; there are now futures and options exchanges for instance. It has been almost 12 years and there has not been a single fraudulent transaction on the block chain. This in itself, we believe, demonstrates the value of Bitcoin, and despite its’ volatility and some past associations with unseemly actors or activities, we stand by our view that Bitcoin is potentially one of the best long-term investments you can put in your portfolio. In fact, the very reason that people use Bitcoin in highly risk-prone criminal transactions is precisely the reason it has value. Despite it’s association with the criminal, if invest in Bitcoin ,Goldman Sachs isn’t going to be able to aimlessly (and criminally) shift your deliveries around to jack up their storage fee. Or what about the greatest bank robbery of all time? We’re talking of course about when the banks robbed everybody and got away with it with pretty minor slaps on the wrist, the Libor Scandal. These two episodes illustrate why some people don’t trust the ‘trusted’ third parties that they have to use. Now they don’t have to. Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? < Previous Next >
Bitcoin Guide: Part 6 - Bitcoin as a Store of Value
The internet had very few users in the early 90s. We think investing in Bitcoin now is like getting exposure to the internet then. Those few users, in its early stages were associated with low stock prices of names that are now the bluest of the blue-chips. We did an in-house study to determine what was behind the rise of the best performing stocks on the market like the FAANGs. We surprisingly determined that about 75% of the gains from those stocks actually has very little to do with company management, new features or the like and more simply to do with the global adoption of the Internet. In other words, the growth that you are getting exposed to in the best of the growth stocks is network growth; the growth of the internet users, by being monetized, is what outperformed wider economic growth. Investing in Bitcoin has paid off to those willing to brave the price swings. In the early 1990s the internet had tens of millions of users and today it has 4 billion. This is why those companies went up so far in value. They held valuable digital ‘real estate’ in a new economy at the dawn of the information age. If you bought exposure to the internet you did well. Bitcoin’s platform is currently dominated by a first generation of users, that will change. As long as human beings are consistently using computers, Bitcoin is more permanent than anything including seemingly mighty political orders and values. Investing in Bitcoin is investing in decentralized internet finance, the internet economy if you will. The intrinsic value of a de-centralized ledger that creates enormous potential for new economic efficiencies is what we are buying. The network effects that benefitted the FAANGS will also benefit Bitcoin, because it is a proven protocol that works. Privacy is diminishing and the premium on privacy for legitimate and illegitimate reasons will persist and increase. Like SWIFT, Bitcoin is the first, and like SWIFT we believe that there’s a lot of value to being the first in the situation at hand; where network effects drive returns. One key characteristic that they share is that even though technology exists to have a better process than the monopolized payments system in the US (you can transfer money instantly from phone to phone in Somalia), the network effect gives continued relevance and value to the platform. Given the magnitude of the problem that Bitcoin solves, and the changing dynamics of whose and what economic activity goes in and out of favor with the state over time, and which currencies fall and so forth, there will always be a need for Bitcoin, and there will always be a community of people who will find and store value in it. Investing in Bitcoin should only be done because you think it has value. We do. Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? < Previous Next >
Bitcoin Guide: Part 5 - Cryptocurrency Investing in Modern Portfolios
Cryptocurrency investing is not for the faint of heart, or at least it hasn’t been in the past. Investing in Bitcoin is hard and is largely uncharted waters for many market participants. While at times it has been correlated to mainstream investment assets, at other times it hasn’t. This is why we advise investors to think of crypto-investments and Bitcoin in particular in the long-term. We treat it like a stock you want to own, or an emerging market you want to invest in; after all we are well-established equity analysts. If you are used to investing in equities, our rules and analysis will make sense to you and we also think that a lot of our crypto analysis dovetails nicely with our wider macro-analysis. Many people ask us how we can be bullish on US Equities and Bitcoin at the same time. Isn’t Bitcoin a countercyclical hedge, like gold? We think investing is Bitcoin is much more than this. While a similar relationship has been observed during some past market conditions, one of the benefits of Bitcoin as an asset is that it is not highly correlated to other major asset classes, making it an excellent diversifier in portfolios that provides a lot of upside. We have developed proprietary valuation models for Bitcoin that we believe approximates it’s fundamental value in a way equity investors can understand. We certainly wouldn’t want to invest in the crypto market without the tools we’ve developed. We are bullish on Bitcoin and think the US dollar will maintain its reserve currency status. We are bullish on US equities for other reasons we won’t elaborate on too much here, but we will say that we believe investing in Bitcoin is a generational trade. You may hear through media coverage or other crypto sources that adoption is way higher than we think it is. We think about half a million people trade cryptocurrency regularly, which is quite a nascent market. We can offer investors wishing to learn about and invest in the space better tools, capabilities, and analysis than any other service. We also have Tom Lee’s 10 Rules Of Investing In Bitcoin which is the first quantitatively informed roadmap investors can use as a firm and actionable guide when investing in Bitcoin and other cryptos. Additionally, some of our proprietary tools like our Bitcoin Misery Index are only available to our members. Our Senior Crypto-Research Analyst David Grider has also developed a proprietary valuation model for Bitcoin that we think will be particularly useful for veteran equity investors. Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? < Previous Next >
Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation?
We think that anyone who is investing in Bitcoin should divorce themselves from political affiliations, preconceived notions and biases and treat it as a simple asset that is subject to the laws of supply and demand, and which we think will enjoy enormous beneficial network effects. The ability of Bitcoin to decentralize commercial transactions is a profound invention that many people may not appreciate. That why to us investing in Bitcoin is more like a growth investment, or investing in companies that made cloud work first. There is no doubt that Bitcoin started out as a political statement and many initially viewed it as closer to a toy than a store of value early in it’s history. While investing in Bitcoin may have been a political statement, now it something that has made many people rich. The easiest way to describe it would be in the context of a class of stocks we've been recommending on the equity-side, casinos. These were out of the risk-tolerance of many in March, but those who took our advice profited handsomely if they purchased them. Now imagine the entire economy is a casino company. What would happen to the economy, and the operating leverage of the company, if the chips kept track of themselves? The Bitcoin White Paper authored by a pseudonymous author who referred to himself as Satoshi Nakamoto, was a modern-day economic equivalent to when Martin Luther nailed his Ninety-Five Theses to The All Saints Church in Wittenburg on the 31st of October, 1517. Once nailed, it could not be undone and the consequences for human society could not have possibly been comprehended at the time. Thesis number 86 was stated, when translated into English as the following: “Why does the Pope, whose wealth today is greater than the wealth of the richest Crassus, build the basilica of St. Peter with the money of poor believers rather than his own?” The primary practice that provoked this first act in one of the greatest ideological transformations in human history was the unseemly practice of the Church charging indulgences to poor parishioners in exchange for their ‘assistance’ in getting God to move the souls of their loved ones from purgatory to the eternal Kingdom of Heaven. Many see a similarity between the obviously corrupted incentives in this arrangement and the incentives of the state with a limitless printing press. Governments have tended to inflate away their debt, at the expense of the lower income quintiles, with the alchemical Central Bank power that seems to flout the incontrovertible law of scarcity. Hence the employment of Luther’s 86th thesis in our description of Bitcoin, and what it was created to achieve. Unlike fiat currency which can be magically shifted from ‘purgatory’ or the Fed’s balance sheet, to member banks and inflated and printed with abandon, Bitcoin is inherently scarce (by virtue of it’s innovative design) and is deflationary. This means, as long as users continue to go up and there is consistent demand, compared to most demand assets it’s pretty easy to determine what the long-term path of Bitcoin will be; up. Investing in Bitcoin is by no means easy, however, we do think it will be incredibly profitable for those wiling to brave the risk. Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? < Previous Next >
Bitcoin Guide: Part 3 - Bitcoin compared to other assets
How’s Bitcoin doing lately? Maybe you started wondering because someone who you know was very, very successful at investing in Bitcoin. Bitcoin remains firmly ahead of gold as the best asset class on a YTD basis. Bitcoin outperformed the S&P 500 in 2019, one of it’s best years in a generation, by about three fold. Wait is that a mistake? No, it is not. Not only is it not a mistake, but Bitcoin’s performance in 2019 was its fourth worst annual performance (less than average for an asset with a life of about 12 years). This is why we are interested in Bitcoin, we believe it is one of the best risk assets you can own in your portfolio and we recommend going OW compared to its typical slice of the investment assets pie. We realize some investors may have been spooked from the massive 50% drop that occurred during the worst days of COVID-19. The market infrastructure and demand impressively weathered that hit and bitcoin exchanges are functioning healthily again. We told our members to buy when the price of bitcoin was around $5,000, those who did have seen a significant retracement of the loss. Investing in Bitcoin is not necessarily for the faint of heart, but to those willing to brave the volatility, there have certainly been better rewards for that risk than in any available asset class. This asset has some serious risk-adjusted return. We are the first, and currently only, independent analyst on Wall Street to cover cryptocurrency. If you want to invest in Bitcoin, then our research is a great place to give you some of the crucial information you will need. We obviously believe in both the current, and long-term value of it as an investment. We cover the entire asset-class from Litecoin, Ethereum, bitcoin mining developments, bitcoin price targets, and when to buy and sell bitcoin. With that being said, it is a very difficult market to navigate and has many unique rules unto itself that we work hard to identify and provide to our subscribers. We have some members that only trade cryptocurrency, and we have other members who may be looking to it as a new and exciting asset to add to their portfolio for diversification. So, don't give your financial advisor heartburn and make him do any more extra work. This is not an easy asset class to navigate. Let us help your cryptocurrency investment be the star of your portfolio. We can help you invest in Bitcoin and other blue-chip crypto assets. We have unparalleled expertise and experience in the space. The Triffin Paradox and the dollar as global reserve currency Nixon was trying to fix what had become a persistent problem with the Bretton Woods agreement of 1944, a structural problem known as the ‘Triffin Paradox’. This is the natural tendency of nations who have reserve currency status to have inherently conflicting interests between it’s short-term domestic political objectives and the objective of long-term international financial stability, and retaining reserve currency status. Foreign nations constantly needed excess supplies of our currency as the network effect of the dollar, and it’s central role in global commerce was cemented by American-funded economic expansion and rebuilding in the wake of the War. This led to a situation where dollars in circulation necessarily exceeded gold in US reserves. What we now look back on as the ‘Great Inflation’ had then begun in 1965 and wouldn’t end until 1982. One of Nixon’s intentions ironically was to curb inflation, which he did in a crude way for the first time not during a major war, by implementing wage and price controls, which shortly thereafter failed miserably. It is likely, due to the large levels of government stimulus and continued bent of government preference toward inflating away debt that the dollar will continue to lose value for the foreseeable future. Many see investing in Bitcoin as an alternative to buying gold as a countercyclical hedge against fiscally wayward government policy that seems to have no end in sight. The role of the dollar as global reserve currency was under threat. Keynes had predicted the imbalances problem and suggested an internationally sanctioned, stable reserve currency called the Bancor. Many Bitcoin enthusiasts may be surprised by this. The tension between a national political agenda and long-term financial stability of the international system creates a potential for political abuse of the reserve currency status. Fiat currency, many theorize, only exacerbates the potential for political abuse and inflation that can cause serious social and political problems if unchecked. The political machinations involved with this momentous decision surely make some of our crypto enthusiasts cringe. Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? < Previous Next >
Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin?
Tom Lee,Fundstrat and FSInsight focus on the the broader outlook of all markets. I don't get what's going on! What does this have to do with Bitcoin, digital currency, and the blockchain? Bitcoin's price and properties as an asset has made a lot of people pay attention, including us. Blockchain technology is one of the most significant inventions in personal finance ever. The recent acceleration and introduction of new market infrastructure like Coinbase, and other cryptocurrency exchanges have multiplied quickly. 'BTC' is now an investable asset and can be purchased passively without the hassle of digital wallets. Scandals have come and scandals have gone but digital assets keep proliferating. Investing in Bitcoin is now easier than ever. Other blue-chip cryptocurrencies are starting to catch up as well if you don’t want to just invest in Bitcoin. Ethereum is a new exciting asset in the space. No one at this time necessarily predicted the continued supremacy of the dollar; after all America’s payment imbalances were caused largely by war expenses in Southeast Asia, a conflict which was ending without victory. Hopes were not too high for continued American financial dominance and very few people realized the significance of a technological protocol created by a group of American banks called the Society for Worldwide Interbank Financial Telecommunications (SWIFT) in 1973. No one could have known it at the time, SWIFT is one of the main reasons banks have been able to maintain profitability despite the aforementioned multi-generational decline in interest rates. If you are looking for something that conceptually helps you understand what Bitcoin is, this obscure protocol may offer a decent metaphor, but at the same time, Bitcoin was a monumental leap in human ingenuity that solved one of our most enduring economic problems; the persistent incentive to violate trust to maximize individual gains. Because of this perpetual problem, digital financial transactions have always needed a trusted third-party to act as an intermediary. Bitcoin was created in the heat of the GFC when trust of those third parties was at an all-time low. Investing in Bitcoin back then would have given you returns in the tens of thousands of percentage points. SWIFT and other inefficient payment oligopolies will maintain their dominance for a while but there is now a proven technological alternative that has the potential to eliminate problematic economic rents charged by the financial industry to individuals for the privilege of using the system. The cost of this in the United States is about $1,000 annually per capita. Will bitcoin replace credit cards and bank accounts? We don't think that will necessarily be the case, but we do think the technology has the potential to create unprecedent efficiencies in the economy. We'll give you an example of how we think about it. This simple protocol, literally a system of connecting unique identifiers to express information necessary for international financial transactions, is an antiquated technological solution that maintains dominance because it was effective and it was first. It replaced a system called Telex that was plagued with human error issues. SWIFT’s generation of unique codes overcame these issues and allowed individuals and businesses to accept payments on an unprecedented scale. This then led to a massive network effect. Investing in Bitcoin, like the banks investment in SWIFT will likely pay off very much. Unlike the benefits of SWIFT though, the benefits of investing in Bitcoin are now pretty much available to any investor in the world. We can help you get started! Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? < Previous Next >
Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin?
What Was The Gold Standard And What Does It Have To Do With Bitcoin? Now, what is this action—which is very technical—what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar. -President Richard M. Nixon, August 15th 1971 Turns out, devaluation was more than just a ‘bugaboo.’ The gold window was officially closed, though few Americans were tuned in that Sunday evening to see Nixon’s address. Even fewer understood the long-term significance of his historic announcement. He had already made a big network splash the month before by announcing his visit to China that would forever change the world, and while that was meant for fanfare, this announcement was made on purpose with few watching. President Richard M. Nixon withdrew the United States from the gold standard to the chagrin of classical economists. What is the gold standard? Some of our younger readers may not remember that until Nixon’s actions every single US note should have been able to be exchanged for the appropriate amount of gold, the price of which was fixed at $35 an ounce. Abolishing the gold standard would launch a brave new world with floating exchange rates and a fiat reserve currency and would ultimately lead to the demise of the international financial order of the day. History debates the merits of the move greatly but one thing is clear, the value of the dollar was not stabilized, in the short, medium or long-term. What is undebatable is that the dollar began a precipitous decline, along with interest rates that would last for the next fifty years. At the time of the announcement, the American public was much more focused on the soon-to-be-announced fate of Lt. William Calley by his military tribunal for war crimes related to his actions in the deplorable My Lai Massacre. This bold move was a politically motivated one not spearheaded at the Federal Reserve but instead by Nixon himself and Treasury Secretary John Connally, who would later go personally bankrupt in the economic devastation that would follow. In the first recorded conversation on the subject, which was on July 27, 1971, Nixon said “One way to work Arthur [Burns] (Federal Reserve Chairman at the time) on this, knowing his ego, is to get him to think the idea was his.” Connally obediently replies “That’s right.” Burns never quite came around, when he discovered Nixon’s intentions he famously said “What a tragedy for humankind.” Milton Friedman would famously refer to him, because of his uncouth and self-serving betrayal of conservative economic principles as “The most socialist US President of the 20th century.” The End The Gold Standard, The Beginning of ‘Gold Bugs’ The move was popular with the public at the time. Nixon successfully spun perhaps the most consequential economic moment in the second half of the twentieth century as a patriotic defense of the dollar against foreign speculators. His authenticity isn’t supported by his subsequently documented efforts to exert political pressure on the Fed to secure election. By the end of the 1970s, the dollar had lost a third of its’ value and the United States endured the worst economic recession since the Great Depression; the notorious period of “Stagflation.” Many think ending the gold standard when Nixon did contributed. According to Keynesian theory at the time, the robust fiscal program of the Nixon administration should have alleviated the situation but instead it created one that was previously considered theoretically impossible, stagnating growth occurring simultaneously as rampant inflation. This toxic economic mix caused conservative investors, or ‘gold bugs’ as they were disparagingly called, to favor an asset above the fray of national assets. Which at least in their minds was gold. Investors wanted something at the time that was independent from the machinations of Great Powers and the personalities leading them. The period of economic misery that followed led to an eventual changing of the guard at the Fed, and Milton Friedman’s monetarists would have their great success in the early 80s, turning the US economy around by taking the political poison pill of a recession in 1982. This time the President did not interfere with then Chairman Volcker to his credit. When inflation went down the Fed reversed policy and Regan streamlined the Federal government and reduced taxes, resulting in strong growth. Some even today advocate returning to the gold standard, however, it is considered somewhat outside the mainstream. Many want a hedge against the uncertainty of future government policy today, many did in the past as well, particularly many who’d lived through the Great Depression and the era that Americans were legally prohibited from owning gold, not to mention the Second World War. That experience had conditioned them to distrust financial institutions and government policy around assets, Gold to them seemed safe, everyone wanted gold. Indeed, during the Second World War (also that generations second crisis) when commerce broke down many people across the globe had to resort to storing wealth in jewelry; diamonds, gold, silver and of course art. Much of this was plundered and appropriated. It seemed to many the ultimate insurance policy in a less stable world. Quick Navigation on this series Bitcoin Guide: Part 1 - Bitcoin Investing: Is Bitcoin a Good Investment and How Much Should I Invest in Bitcoin? Bitcoin Guide: Part 2 - What is All The Hype About Bitcoin? Bitcoin Guide: Part 3 - Bitcoin compared to other assets Bitcoin Guide: Part 4 - Bitcoin and inflation, how is Bitcoin related to inflation? Bitcoin Guide: Part 5 - Cryptocurrency investing in modern portfolios Bitcoin Guide: Part 6 - Bitcoin as a Store of Value Bitcoin Guide: Part 7 - The Bitcoin Halving and its impact Bitcoin Guide: Part 8 - Is Bitcion a Risk On Asset or is Bitcoin a Risk Off Asset? Next >
VIX Series - Part 4: How To Read The Fear Gauge: VIX Value and How It's Calculated
CBOE VIX trading and CBOE VIX options can be incredibly difficult. Technically, the VIX should represent one standard deviation of market returns for whatever period an index is calculating. The main VIX calculates 30 calendar days of implied volatility and interpolates options between 23 days and 37 days to expiry (remember not how it’s settled!). The spot price of the VIX is calculated on a minute to minute basis to keep up with the fast-paced markets. The CBOE Volatility Index is not an ETF, and it cannot be bought and sold, only futures and options contracts that derive their value from its price and time to expiry can be purchased. The index value acts as price mechanism, so if your strike price is $15 and the VIX is at $20 then your option's intrinsic value would be $5. Of course, in a real situation the intrinsic value would be supplemented by time value, the longer until expiry, the higher the time value. Since the index is made of options instead of stocks, which makes things a little bit different, similarly to other indexes, options, not commodities, are selected by rules to make up the wider index. The actual components of the VIX are the near and next-term SPX options. In fact, because of how the VIX needs to roll-over based on its rules the number of options used to calculate the VIX may change from day to day or even minute to minute, particularly since traders can game it a little bit by bidding zero on a strike price and therefore getting excluded from the index at that moment since zero bid/asks are not able to be used in the formula. Volatility Term Structure: Getting Signals From CBOE VIX There are robust futures markets for the VIX. Futures contracts create curves similar to interest rate curves (think T-cure) which can tell us quite a lot about anticipated index value. CBOE VIX trading can only be done with either futures or options, but are settled in cash at an agreed-upon reading of the index. The properties of these markets can tell us a lot about how markets perceive the future, particularly in the event of an ongoing disaster. For instance, during the panicked selling in March when the VIX reached highs its curve was in backwardation which happens rarely in times of great tumult. What this literally means is that the market is expecting more volatility in the short-term, than in the long-term. One CBOE VIX trading strategy is to sell call options on the index when it is anomalously high. Any time the VIX is in backwardation, based on historical data, it will likely correct back to contango. Many engaged in CBOE VIX trading will use this strategy. This means that the market expects more volatility in the near term than the short-term. If you picture a curve of VIX futures going out into the future like an interest rate curve, that is how the term structure usually is shaped; in contango. This means the market, as would be generally the case, would expect more volatility as time goes on. Since the rise in stock prices further out maturities like Dec 20 and Jan 21 have started to normalize, but the VIX curve still shows potential for elevated risk around the election, which is also normal. When the VIX goes into full and normalized contango again, it will be a very positive sign for markets. Generally, when $VIX.X goes below $20 it is also considered a bullish market indicator. Stock returns have been observed over time to negatively correlated with realized volatility and positively correlated with implied volatility. One thing you can do is get into the weeds and calculate a volatility index of some of your favorite stocks and then compare the volatility term structures to see how they diverge and how they are similar. There are also many new ETFs and ETNs that own primarily, or partially a lot of volatility assets. As you can see above, the VIX term structure has normalized but still has some elevated readings around the time of the election. Our Washington Analyst, L. Thomas Block, has provided some excellent analysis on what happens to the stock market during elections. We rely on him for assessing headlines with the benefit of a seasoned political operator. Based on our analysis, we don’t really get the glum sentiment on the street around the election. Other Volatility Indices The Chicago Board Options Exchange calculates several volatility indices and the VIX and the old VIX (VXO). They also calculate Cboe Short-Term Volatility Index (VIX9D) or nine-day expected volatility, it has the (VIX3M), (VIX6M) and (VIX1YR) which reflect the three month, six month and one-year volatility respectively. You can find more on the VIX and the white paper on valuation at Quick Navigation on this series VIX Series - Part 1: What Is The VIX And How Does It Work? VIX Series - Part 2: What Is Volatility? VIX Series - Part 3: Chicago Board of Options Exchange (CBOE) Builds The VIXVIX Series - Part 4: How To Read The Fear Gauge: VIX Value and How It's CalculatedVIX Series - Part 5: How To Trade (And Read) The CBOE Volatility Index (VIX) < PreviousNext >
VIX Series - Part 3: Chicago Board of Options Exchange (CBOE) Builds The VIX
For most of human history, if you were a victim of the regular fits and starts that affect commerce on Earth, you were pretty much out of luck. Of course, there were old versions of state bailouts every once and a while, but generally, the risk was not a very easy thing to manage. One lousy season or one bad storm could often ruin the farm or the business. This problem eventually led to the establishment of futures markets for agricultural commodities. The Chicago Futures Exchange (CFE) would pioneer many of the strategies that have become common in futures markets. These innovative instruments, which gave people an unprecedented ability to hedge risk, would forever change how business was done, and the risk was managed. Chicago, which was geographically positioned in the middle of America's heartland, would become one of the world's most critical commodities exchanges and innovation-centers for finance. The CBOE volatility index changed how volatility can be used and prepared for by investors. We’re not teaching you to how to trade the VIX, as this is very complicated and requires more than a few years of experience in derivatives valuation. We do, however, want to make you appreciate this complicated financial instrument that many investors perceive incorrectly. The Greek letter used for Implied Volatility in the Black-Scholes Options Pricing Formula is Sigma. Therefore, the first iteration of what would become the VIX be called the Sigma Index in an early paper published by Brenner and Galai in 1989. By 1993, the first version of the index, based on the S&P 100 (OEX) index, was formulated. This 'old VIX' is now under the ticker VXO. It was met with extreme demand from retail and institutional investors. The VIX is the CBOE's most popular product ever in a long list of popular and widely used financial instruments. Technically, the VIX is the volatility of a variance swap, not an actual volatility swap. This is for reasons of calculation because a variance swap can be more easily replicated through vanilla put options and call options. History was made when volatility could first be 'bought' and 'sold' as an asset. How to trade the VIX successfully is not easy though. By 2003, the methodology had changed, with the help of Goldman Sachs, and the VIX index option prices were now being calculated on the broader S&P 500. The actual number of the VIX should not be construed as a percentage, as that is inaccurate. However, the way the VIX is designed is to have its number interpreted as an implied volatility reading. Since the VIX is calculated from the price of SPX options, which is the best proxy for the broader American stock market, it is considered a macro-indicator. However, volatility indexes can be set up for any stocks; in fact, CBOE does them for many large caps. It uses a variant of the VIX calculation to create a similar index from each name’s options market. Other VIX calculations result in other indexes. VIX calculations are done in real-time. However, if you’re going to trade the VIX and intend to exercise, be sure to read up on the settlement rules. Many a trader who has thought they had a pretty sweet in-the-money position until they realized that the VIX is settled for exercise in an entirely different way than it is calculated in real-time. VIX options usually expire on Wednesdays as opposed to Friday, even though the underlying SPX options all still expire on Friday. How To Trade The VIX This important index regularly fluctuates based on threats to market stability. Unlike single stock names, the price action in the VIX is very much a comprehensive picture of how markets feel. Trading this asset can be incredibly difficult since it can become very headline dependent. However, the thrust of our research is data so when top-down investing environments dependent on headlines develop we get right into the relevant data and give you useful insights for how to trade the VIX. As you can see, we have been monitoring different groups of stocks compared to daily cases and have been trying to keep our community one step ahead of the crowd. How to trade the VIX, you ask us? Always maintain an edge in the data and ahead of the competition and you will; be off to a good start. Whether you’re a new investor or a sophisticated trader we believe you will find our analysis useful. Also, check out our industry-leading technical analysis by Rob Sluymer. Quick Navigation on this series VIX Series - Part 1: What Is The VIX And How Does It Work? VIX Series - Part 2: What Is Volatility? VIX Series - Part 3: Chicago Board of Options Exchange (CBOE) Builds The VIXVIX Series - Part 4: How To Read The Fear Gauge: VIX Value and How It's CalculatedVIX Series - Part 5: How To Trade (And Read) The CBOE Volatility Index (VIX) < PreviousNext >
VIX Series - Part 2: What Is Volatility?
You may have a negative connotation of the word volatility, and for a good reason. But what is volatility, really? It is usually in the common parlance most often when things are bad or expected to be soon. It’s an emotive word, but not necessarily in the financial context all the time, believe it or not. However, the word’s official definition doesn’t mean bad, or emotional. In finance, volatility is a less loaded term that simply means the change in price over a given amount of time. So, in a straightforward sense, it is just the actual price movement of an asset. Calculating historic, or realized volatility is usually a good way to determine the future price range of your asset, but not always. Over-reliance on historical data plagued institutions during the crisis. Stochastic risk models, Monte Carlo simulations, and Regime Switching Rare Disaster models have been found to be effective ways to model volatility in addition to historical data. Relying solely on historic volatility can be very risky. Investors need something more than just past data to make the best decisions possible, and since Future or Options markets give a lot of information about the mood of investors, it is exactly what is used to derive the CBOE VIX. Many investors are familiar with the VIX, or they have been conditioned in a Pavlovian fashion to know one thing, the VIX going up suddenly and sharply usually means frantic selling and hard times. Think back to March. We can all pause and think of a moment when we saw the VIX spike to a level that made us lose our breath for a moment, but so far, it is coming out of backwardation and moving toward more normal levels. Trading options or futures on VIX is tricky business, particularly if you're not highly experienced with options, and the effects on valuation and liquidity risk that come with owning European-style options, which can only be exercised at expiration opposed to at any time up until expiration are complicated. VIX is perhaps the most complex of the commonly cited indexes in how it is calculated. Unlike ETFs or stocks, you cannot simply buy and own the VIX. What Is Implied Volatility? Derivatives are assets that have their value derived from an underlying asset. Thus, their market prices are subject to much more wild swings as a result of the leverage these instruments utilize. You cannot buy and hold derivatives, like options and futures, because they have an expiration date. They give you the right to buy or sell a security or commodity at a previously specified price regardless of the underlying price. A call option is the right to buy a security at a certain price before a certain date, and a put option is the inverse, the right to sell. You can be short or long options, long meaning you have rights (to exercise or sell your option) and short meaning you have obligations, to purchase or sell the securities. The strike price determines how far away from the actual price, the option's value is. Options with strike prices closer to the actual price of the asset have higher premiums. This principle is the basis of Black-Scholes. When an options chain is following the model in real life you will be able to observe something called the ‘Volatility Smile’. This is the natural tendency of the implied volatility to go up, just as interest rates would on a curve with maturity. So, the further out of the money an option is, the high its implied volatility. It is impossible to predict the future. However, we can make sense of the best information we have, coupled with assumptions. This is what Fisher Black and Myron Scholes did when they created their revolutionary options pricing model, The Black-Scholes Formula. Subsequent options pricing models have been developed to enhance and improve the original. However, implied volatility is the only factor of these models not directly observed in the market. In other words, implied volatility is derived through the model using other observable data. The higher an implied volatility, the higher the potential move in the premium of an option, and the underlying stock price. The inputs used to derive implied volatility are the European-style S&P 500 index for near term options with more than 23 days until expiration and next term options with less than 37 days as well as risk-free US T-Bill Rates, which are used as a proxy for the input of the risk-free interest rate. One important thing to remember about implied volatility is that it does not determine which direction an asset will move in price. It only has a high probability of moving away from the current price. This metric tries to approximate the future value of the option using the available information at hand. So, primarily to find a stock's implied volatility, you would work backward from the Black-Sholes inputs. This is important to remember because the model is based on assumptions that sometimes deviate from actual market conditions. So, it is important to remember that implied volatility is not predicting the future, just giving the best indication of its probability that we can find. Due to the centrality of agriculture in early derivatives trading, Chicago and the Chicago Board of Options Exchange (CBOE) became key to the development of the financial industry. One of its biggest contributions to finance and markets was the volatility index. What is volatility? It is something that can now be traded, managed, and hedged better than at any time in previous world history. Whether you are buying VIX options or futures, or maybe getting some exposure through an ETF or other passive vehicle, you can significantly mitigate your downside loss when volatility rears its ugly head when you use all the tools the market has to offer. Source: CBOE Quick Navigation on this series VIX Series - Part 1: What Is The VIX And How Does It Work? VIX Series - Part 2: What Is Volatility? VIX Series - Part 3: Chicago Board of Options Exchange (CBOE) Builds The VIXVIX Series - Part 4: How To Read The Fear Gauge: VIX Value and How It's CalculatedVIX Series - Part 5: How To Trade (And Read) The CBOE Volatility Index (VIX) < PreviousNext >
VIX Series - Part 1: What Is The VIX And How Does It Work?
“A good forecaster is not smarter than everyone else, he merely has his ignorance better organized.” -Anonymous This recent crisis saw the Chicago Board Options Exchange (CBOE) Volatility Index closing at its highest level in history, above $82. But, many may ask themselves what is the VIX? What does a closing reading of 82 even mean?! This is the highest closing reading for stock market volatility ever. The market has now retraced all of its losses since that time and made a new all-time high (ATH). However, due to the uncertainty associated with COVID-19, VIX levels remain elevated relative to historic norms. We believe they will soon decline to levels that will attract a lot of the $5 trillion in capital on the sidelines. One of the reasons investors are so skittish is because of the extraordinary pace of the virus-driven drop in March. The market lost a lot quicker, but as we predicted in the heat of the March lows, a ‘V-shaped’ stock market recovery would follow and we would soon retrace and even achieve new highs. Still, the VIX recently hit levels higher than it has ever in its now substantial history, and once you know what the VIX actually means, it may seem even more peculiar to you. This extraordinary number, shown above, surpassed even the highest close during the financial crisis. You might have heard of the Volatility Index, or VIX as it's known by shorthand; most investors know that they at least see it flashing higher when things go bad. However, the VIX is an important market signal to understand. We would like to make it an even more valuable tool during a time of high uncertainty. What does the number mean? If the VIX is at 25 today and let's say the market is at 100 (for ease), then the stock market believes within a 68% confidence level that the market will be within $75 and $125 in 1 month. This is what the VIX tells us, and though it cannot predict the future, the action in options markets is often predictive. What is market volatility? What is market volatility? What is market noise, and are they different? How can we tell when it's just normal volatility or a secular directional change? In statistics, noise is irrelevant data, and signals are the pieces of information that illuminate truth. In this spirit, our Chief Editor Vito Raccaneli runs a column called “Signals From The Noise” in which he regularly provides single name stock picks with actionable price targets and unlike many competitors, a section where he candidly explains where he could be wrong. For those concerned about market volatility he also ran a superb webinar on using covered calls, the lowest risk derivative strategy that all stock-owners should know, to help stabilize returns and income during periods of heightened uncertainty like we currently face. Many different data are continually being assessed by investors and the machines that do their bidding. Option prices have proven one of the most significant pieces of this information in managing risk. There are so many different index options these days, but perhaps none is as famous and ominous as Wall Street's well-known 'fear index'. We’ve all heard fear index, and we all know the VIX goes up when things are volatile, but what is the VIX, exactly? Most of the constant flow of information is nothing but noise, however, buried deep within these copious data points, and headlines are hints to what will happen in the future. We have to determine which is more critical when selecting the important signals from the noise—deciding which is signal and which is noise is what makes the difference between who makes money and who loses money. Luckily, over the past decades, new and exciting tools like VIX have proliferated, which calculated the implied volatility of S&P 500 index options to arrive at a number that expresses implied volatility. This number should now be less ‘noisy’ to you. You cannot buy the VIX index because it is interpolated from a wide range of strike prices on the stock market. It is literally the market's expectation of 30-day volatility for the broader index based on the difference between put options and call options. Mohammed El Erian, in his 2007 book When Markets Collide, recounts the story of a trader he started working for in London who had a higher level of 'street smarts' than some of the other newer analysts at the time, including El-Erian. On average, market days, he would regularly solicit the fundamental-driven views of the better-studied analysts. On days when the market was experiencing turmoil, he would instruct all the newbies, sometimes aggressively, to stay as far away from his desk as possible to avoid becoming confused by some fundamental analysis that was irrelevant to the days' exciting market action. This trader, it appears, was trying to keep the noise out. Even though, under different circumstances, that noise might have been useful information. Unfortunately, much of this comes down to experience, training, and a firm grasp of financial mathematics. If you’re new to investing, you could probably use a little understanding of things like volatility and how to hedge against it. Even if you’re a veteran investor you may still find yourself wondering what is the VIX? We bet you could use a little refresher on volatility and some of the most popular ways it is measured. We have written this piece for all skill levels. Hopefully, we can help turn the famous Volatility Index, widely known at perhaps a disservice to the investor, as the market's fear gauge. It would probably make a little more sense to most investors if you called the VIX what it is, the 30 day implied volatility of the S&P 500. This is where it gets its gloomy moniker because implied volatility is measured in the price of options on the most important index. Generally, people want to purchase put options when uncertainty, or fear of an unknown outcome, is higher. Quick Navigation on this series VIX Series - Part 1: What Is The VIX And How Does It Work? VIX Series - Part 2: What Is Volatility? VIX Series - Part 3: Chicago Board of Options Exchange (CBOE) Builds The VIXVIX Series - Part 4: How To Read The Fear Gauge: VIX Value and How It's CalculatedVIX Series - Part 5: How To Trade (And Read) The CBOE Volatility Index (VIX) Next >