Saturday, May 22, 2021

Bitcoin: Blockchain, Mining, Energy

 

Bitcoin: Blockchain, Mining, Energy

It’s no secret that Bitcoin and cryptocurrencies, in general, have gained significant popularity and notoriety over the last 12 months. Most notably because the return has been an astronomical 430% over the time period, but also due to companies such as Tesla, MicroStrategy, and Square investing a collective $3.9 billion earlier this year. For anyone invested in Bitcoin or following the asset, this last year has not been without its ups and downs.

What is Bitcoin?

Bitcoin is a decentralized digital currency. All transactions made with bitcoin are noted on a public ledger and verified by a network of computers. Many people and companies are working to verify transactions instead of just one entity, making it decentralized. The public ledger of bitcoin transactions is stored in the blockchain.

What is the Blockchain?

Think of it simply as blocks being stacked on top of each other, one after the other, with each block containing different transactions. The massive network of computers mining the bitcoin is responsible for verifying each public transaction on the ledger. Once a block is full, it needs to be closed and another block opened for the next round of transactions. In order to close the block, an incredibly complicated math equation must be solved. Whoever is responsible for solving the equation is awarded bitcoin as payment.

While the bitcoin blockchain network is public, it remains completely anonymous. Each user is assigned their own specific public key. A long string of numbers and letters attached to each transaction instead of the user's name or username.

For more information and explanation on blockchain and how it can prevent large-scale attacks, click the links below.

  1. Investopedia
  2. Built In

What is Mining?

Mining is the process of solving a complex math problem required to close a block and add it to the chain. There are about four billion possibilities to sift through in order to solve the problem, thus confirming the necessity for equally complex and powerful computers. Miners who successfully solve the math problem are awarded their payment, currently worth 6.25 bitcoin. In dollars today, approximately $315,000.

However, mining doesn’t come without its own costs. Building these supercomputers and mining facilities is very expensive. Not only the upfront costs, but the expenses related to powering the systems are in a class of their own. If people and companies want to increase their chances of solving the equation first, they need more computers. More computers mean more electricity.

Click to Enlarge

Using data from the University of Cambridge’s Bitcoin Electricity Consumption Index, VisualCapitalist put together a visual and chart of bitcoin’s power consumptions compared to other companies, states, and even countries. The bitcoin mining network consumes more electricity than the entire country of Norway. Considering this massive power need, there is hope the bitcoin mining network will be a boon to the global transition to renewable energy. To learn more about the relationship between bitcoin mining and renewable energy, click here.

Tuesday, March 30, 2021

Irrational Exuberance

 

Irrational Exuberance

There’s no question markets have been volatile this year. If we peel back the top layer, there are many different events we can blame it on: inflation, treasury yields, the Fed and interest rates, Covid vaccines, unemployment, even the colder than normal February. But, what if we didn’t peel back the top layer? Instead, we focus on a potential over-arching theme as a way to over-simplify what’s been happening in the stock market.

In a December 1996 nationally televised speech, then Chair of the Federal Reserve Board Alan Greenspan referred to the behavior of stock market investors as “irrational exuberance”. Since then, this term – irrational exuberance – has been used to in conjunction with speculative and instable markets.

In his bestselling book aptly titled Irrational Exuberance, author/economist/Nobel prize winner Robert Shiller defined it as,

“the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increase spurs investor enthusiasm, which spreads by psychological contagion from person to person, and, in the process, amplifies stories that might justify the price increase and brings in a larger and larger class of investors, who, despite doubts about the real value of the investments, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

One of the longer sentences you’ll see, but by breaking it down and providing some examples we can better understand what it means. And, how it might explain markets today.

GameStop

In a matter of weeks, even days, the price of the stock went up some 1,500%. During this time, it made headlines in all major news outlets and story after story was coming out about people making tens and hundreds of thousands of dollars. This spread like wildfire and more and more people started buying into it, gambling for the chance to hit it big. All of this despite the fact the company has been closing stores and losing money for years. “Which news of price increase spurs investor enthusiasm…. amplifies stories…. justify the price…. and brings in a larger class of investors… are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

If we back up, we can see this at work in other instances as well. AMC experienced similar movement. Hertz after announcing bankruptcy rocketed higher. Even the number of brokerage accounts and high risk option contracts hit all-time highs during 2020.

Global Clean Energy

Throughout the events leading up to the election in 2020, many investors were betting on Biden winning the election to become the next President. A part of his campaign was stressing the importance of developing renewable sources of clean energy, re-entering the Paris Agreement, and ultimately trying to reduce the United States’ carbon footprint. Thus, the prices of clean energy ETFs and solar ETFs grew upwards of 100%, some even 200% in just one year. Once the election was finalized, these funds grew even faster, spurred by the presidential confirmation, more investor exuberance, and by following the herd-like behavior of others rationalizing the idea that these risky assets will continue to just go up.

Overall Stock Market

Since the bear market correction reached its bottom last March, during a time of economic uncertainty, the market remained certain we would get back to normal in no time. Analysts and investors alike began pricing in a full recovery, the Fed confirmed they would not increase short term interest rates, and growth was still king. The price increases were fueling enthusiasm bringing more investors back to the markets even though the economy was partially shut down. Companies stopped releasing projections because of the constant changing environment – some weren’t sure they were going to make it – but the success of others and lack of sports to gamble on paved the way for more price growth and more risk.

Perhaps investors have been behaving with an irrational exuberance.

The Fed has remained accommodative, but the threat of inflation has many worried rates will need to be increased. Paired with the tripling of 10 year treasury yield, it appears a possible speculative risk bubble is slowly losing steam. The story this year has been one of de-risking, a rotation from growth to value. In years past, the high-flying tech stocks were the basis of the return in the S&P index (a blended approach). This year, however, large cap value (+8.7%) is significantly outperforming large cap growth (-2.3%).

Friday, January 29, 2021

Power of the Retail Investor

 

Power of the Retail Investor

In recent weeks, and more notably recent days, shares of GameStop [GME] and AMC Entertainment Holdings [AMC] have been gobbled up hordes of retail investors. So much so that prices have gone up 320%, and 161% just since Monday, respectively. In “GameStop Mania Reveals Power Shift on Wall Street—and the Pros Are Reeling”, a recent article published in the Wall Street Journal, journalists Gunjan Banerji, Juliet Chung, and Caitlin McCabe explain how this has been happening and the culprit behind these mammoth price movements.


What started as a general conversation about the potential value of GameStop on popular platforms like Reddit, Facebook, Twitter and Discord has turned into an all-out war “between professionals losing billions and the individual investors jeering at them on social media.” So much so that regulators within the SEC are beginning to look into the potential of market manipulation.

GameStop and AMC alike have been struggling for some time. Many large institutional investors and hedge funds started betting against these companies survival by opening short positions (benefiting when the share prices goes down). Shorting a stock is when the investor borrows shares that are immediately sold at the current market price. To close the position, the investor has to buy back the number of borrowed shares. The net gain comes from the profit of selling the shares, minus the expense to buy them back, minus any interest charged to borrow.


The biggest threat to short sellers is the stock price rising quickly resulting in a short squeeze, “a phenomenon that occurs when a stock’s price begins rising, forcing bearish investors to buy back shares that they had bet would later fall to curb their losses.” Forcing the short sellers to buy creates even more demand for the stock pushing the price higher and higher.

Many of the individual retail investors view the current situation with an “us vs. them” mentality. After being at the hands of the large hedge funds and market makers for years, they finally seem to have taking control. Even if only for a short time. “They are encouraging each other to pile into stocks, bragging about their gains and, at times, intentionally banding together to intensify losses among professional traders…” note the authors at the Wall Street Journal.


In fact, since the start of 2021, short positions in GameStop have lost a total of $23.6 Billion with over half coming from yesterday alone.

What Next?

It’s certainly fun to watch the share price skyrocket, but it’s only a matter of time before the individual retail investors run out of new money and begin to take their astronomical profits. When it happens, the price will begin to fall. Fast. The company has had a negative net income for the last few years and began closing their stores around the country. Fundamentally, they appear to be on their last legs. But, “fundamentals do not apply to retail traders. It’s all about sentiment.”

While all of this is happening, it’s paramount to remember the importance of investing with a plan. Over short periods of time, asset class returns and individual stocks can vary widely; however, long-term investors are typically rewarded for thoughtful portfolio diversification. While we may experience continued seemingly random sprints of price volatility, rest assured the future is always the same.  Maintaining a diversified allocation that is consistent with your long-term goals, combined with periodic rebalancing, and has consistently resulted in beneficial long-term financial outcomes.

Monday, January 25, 2021

Market Predictions

 

Market Predictions

“The only function of economic forecasting is to make astrology look respectable.”  – John Kenneth Galbraith, Economist

 

THE 2021 MARKET PREDICTIONS ARE IN, AND THEY’RE PROBABLY WRONG.

 

Every year, the top investment banks, research institutions, and market analysts make their predictions on where the S&P 500 (stock market) will close the year. They have mountains of research at their disposal, a slew of economic indicators, and they still get it wrong most of the time.

Take 2008 when the markets fell 38% as an example:

  • “Stocks will reach new record highs at some point during the upcoming year.” – Robert C. Doll, Vice Chairman and Chief Investment Officer of Global Equities at BlackRock (January 2009)
  • “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.” – Joseph Cassano, AIG financial products head (August 2007)
  • “The Federal Reserve and Congress have delivered a ton of economic stimulus, and that stimulus is set to juice up an economy that has been weak, but not terrible. If everything goes according to plan, the economy will grow faster in the second half of the year, and a recession will have been avoided.” – Kevin Hassett, American Enterprise Institute (June 2008)

Or 2017 when the markets rose 19%:

  • “However, we see a down market in H2 [second half] 2017, hence our year-end 2017 target of 2,300 (3% gain).” – Credit Suisse
  • “Our mid-2017 target is 2,250 while our preliminary 2017 year-end target is 2,325 (4% gain).” – Citi
  • “We think that, fundamentally, risks for equities in 2017 are likely to be higher compared to this year (year-end target 2,400. 7.5% gain)” – JPMorgan

 

What’s the point?

No one has a crystal ball. No one can predict the future. It’s cliché, but true. When analyst forecast’s starting hitting inbox’s and making headlines, simply ignore them. If there is one key takeaway from learning the poor track record of predictions, it’s to remember the importance of a diversified allocation. Over shorter periods of time, investment returns and volatility can vary widely; however, long-term investors are rewarded for their time in the market, not for trying to time the market.  Maintaining a diversified allocation that is consistent with your long-term goals, combined with periodic rebalancing, has consistently resulted in beneficial long-term financial outcomes.

“Today’s headlines and tomorrow’s reality are seldom the same.”

Saturday, November 14, 2020

What is "The Market"?

 

What is “The Market”?

Volatility has played a big part in 2020 and there’s no sense it will stop anytime soon. More people are paying attention to the ebbs and flows of the stock market – whether they want to or not – thanks in large part to the news cycle. “Dow Soars 800 points…”, “Nasdaq jumps 2%…”, “S&P Futures eases below 3,600…”

There are countless attention-grabbing headlines all seemingly referring to the same stock market, but promoting different letters and indices with varying percentages and numbers. What is the difference between the Dow Jones, the Nasdaq, and the S&P 500? And what does “The Market” actually mean?

The Dow Jones Industrial Average

One of the most widely known, and America’s original stock index, the Dow Jones is made up of 30 of the largest stocks from each major sector, excluding utilities and transportation. The value of the index is price-weighted, which means the index is only affected by changes in stock prices. A 1% price change for UnitedHealth Group ($351.70/share) has a much larger impact on the index than a 1% change in Cisco Systems (39.33/share).

Is the Dow a good measure of the stock market? There are better. While it takes into account industry leaders, there are only 30 stocks measured in a world of hundreds and hundreds of stocks. Plus, it’s only measured by price changes which can sometimes be misleading.

The Nasdaq 100 Composite Index

As the title suggests, the Nasdaq 100 is made up of 100 different stocks. The description from Nasdaq’s website explains the index as, one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization”. Unlike the Dow, the value of this index is based not on the prices, but instead on the market cap of each company.

Is the Nasdaq a good measure of the stock market? It’s better than the Dow, but still not the best. The Nasdaq is very tech-heavy and growth-focused, so it doesn’t do an adequate job of measuring the market as a whole. Additionally, it only makes up 100 stocks where there are multiple hundreds of companies.

The S&P 500

This index tracks 500 of the largest U.S. companies in the stock market. The index is market cap-weighted like the Nasdaq and therefore a 10% change in a $20 stock will affect the index in the same way as a 10% change in a $50 stock will.

Is the S&P 500 a good measure of the stock market? Yes! This index has a much broader look at the overall market and is much more encompassing compared to the Dow or Nasdaq. When referring to “the market”, this is what most people mean!

There are still downsides to using the S&P 500 as a measure of the overall stock market. To learn more, click here to see the post, “S&P 500 Dominated by Tech Mega Caps”.

Volatility, Time, and Diversification

As we continue through these uncertain times, volatility will stay heightened, stock market headlines will stay at the forefront, and emotions can run wild. It’s important to remember time in the market is more effective than trying to time the market. Over shorter periods of time, investment returns and volatility can vary widely; however, long-term investors are rewarded for their time in the market, not for trying to time the market.  Maintaining a diversified allocation that is consistent with your long-term goals, combined with periodic rebalancing, has consistently resulted in beneficial long-term financial outcomes.  We remind clients to keep their next 7-12 years of anticipated cash distribution needs in stable assets such as cash, CDs, and short-term bonds.


Monday, April 16, 2018

Economically Speaking - Part 1

There has been a lot going on lately and for the benefit of my and hopefully you, I'm going to get my thoughts down. It's like bumper cars in my brain right now and I hope to get this sh..tuff more organized. Almost daily, something new will come to the foreground command my attention. I wake and wonder what I will unintentionally focus on today. Will it be: trade wars, war wars, unemployment, interest rates, inflation, the yield curve, quantitative easing, GDP growth, cryptocurrency being wacky....you get the picture.

In no particular order, here are my own opinions on the things we have been hearing. As always, from an Uninformed Investors point of view.

I've decided to make this a multi part post. It would be too long to put it all here and I did not use my time wisely and the things I wrote about earnings pertain to events today [4/16] that should be posted today. So, Part 1!


Yield Curve

The spread between the short term and the long term yields are thinning. At this point it isn't any cause for concern, more so just something I'm keeping in the back of my mind. Why is this important? Every recession has been preceded by a negative spread between the 10 year treasury and 2 year treasury yields. The average time is about 18 months, or a year an a half.