The financial markets can at times be characterized by the presence of animal spirits, and the recent boom in cryptocurrencies fits this order. While we have been receiving a lot of questions around investing in cryptocurrencies and the value of their inclusion in institutional portfolios, it is important to distill their analysis down to their most granular form, and this blog touches a little more on that.
First and foremost, we must determine if allocating capital to cryptocurrencies does in fact fit the definition of investment or does it better align with pure speculation. The central focus for the investor is on guarding against the future, with the facts from the past being used only as a rough index for the future. Strong emphasis on book values, working capital, debt to equity and coverage ratios while identifying those enterprises with a long history of durable, predictable and stable free cash flows as permanent holdings.
Furthermore, if the true value of any asset can be deduced down to the free cash flow, then how can we correctly estimate the intrinsic value of cryptocurrencies and qualify them as an asset when there is zero free cash flow generated and their inclusion in portfolios produces nothing? How can investors identify the disconnect between price and value, without the ability to estimate the intrinsic value of cryptocurrencies within a reasonable degree of certainty?
Conversely, speculators are not to be concerned with the intrinsic value of securities and are instead fully price focused with an emphasis on expectations of the future. Most often this includes temporary holdings with purchases made on margin seeking capital appreciation by hoping to predict the future. There is nothing wrong with being a speculator and solely price focused so long as you know who you are and managing risk accordingly. Thus, the allocation of capital to cryptocurrencies should be clearly defined as pure speculation, fully price focused hoping to predict the future.
The price of bitcoin futures, the most widely traded cryptocurrency, has been feeling a lot of love by market participants recently for a confluence of reasons. Whether it’s because of expectations for further interest rate cuts by the Federal Reserve in response to disinflation or a looser regulatory environment as a beneficiary of the “Trump Trade” or for other reasons, the tailwinds for crypto are undeniable.
When our proprietary technical analysis triggered a well-specified breakout in bitcoin above 75K in early November, we identified a probability over the near/medium term that the price of bitcoin could reach 100K in short order. Subsequently, when it appeared the market price had reached a terminal extreme and touched our 100K target price towards the end of November, we recommended taking some profits. At present, the market price of bitcoin appears to be in an uptrend with little overhead resistance with the 75K price level now serving as strong institutional pools of support. We recommend a market neutral stance on bitcoin combined with prudent risk management. Nothing is set in stone and the world is changing by the minute if not second, so you always must keep that in mind.
At The Practical Contrarian we provide market research based on our proprietary data driven approach to help speculators navigate the trajectory of market price action based on where a security has been, where a security is now, and where a security is likely to go. When the market speaks, we listen, then we translate the market’s message to our clients. Our thoughtful, thorough, and disciplined approach for extracting actionable insights is based on well specified criteria and rule sets to remove the human factor and guesswork.
If you are a speculator in cryptocurrencies or the commodity futures markets and are seeking actionable insights to help navigate your portfolio for the wide range of potential market outcomes, Let’s Connect.