The bitcoin bonanza

11 March 2021 Gareth Stokes

How do you describe a financial instrument that adds 55% in value over the final 31 days of 2020 and then another 63% in the first six weeks of 2021? Bitcoin (BTC) is on an unstoppable tear, growing a staggering 886% since its 12 March 2020 low of US$4857,10 per coin. It has left experienced market analysts ‘lost for words’ as they attempt to explain investors’ obsession with a crypto asset that few completely understand. Where does Bitcoin go from today’s almost US$50000,00 levels?

“I know my subject, I know a great deal about Bitcoin, but I cannot tell you what it is going to do from here,” says Nigel Green, CEO at deVere Group. He used his presentation titled ‘Investment opportunities in the new world’ to share some views on cash, bonds, equities and, of course, speculative assets. 

Mixed feelings about stellar equity market returns

Asset managers and financial advisers probably have mixed feelings when preparing for Q1 2021 client meetings. On the one hand they can be proud of the real returns generated from a range of equity-rich portfolios, on the other they could be ambushed by lay investors who have earned triple digit returns from being in the sweet spot of a super-charged US equity market. Even mega-cap technology shares have posted double and triple digit growth through 2020. The reasons for the market’s stellar performance can be found in governments’ unprecedented financial stimulus in response to pandemic. Green explains that the record amounts of fiscal stimulus pumped into global markets have gone in search of yield, ending up in equities. “When the US Federal Reserve adds money to the economy, stock prices go up,” he says. 

It is worth noting that the US$9 trillion pumped into the US economy during 2020 represents 22% of all the US dollars in circulation globally. Many economists and financial analysts have warned that the level of bailout funding, which shows little sign of abating, will cause inflation. But Green disagrees. He explains that modern governments are able to use figures and projections to work out how big their economic problems are, and then go about injecting the exact amount of money needed to address that problem. “If they add too much money you end up with inflation, if they add too little, you risk recession,” he says. Unemployment is the other counter to the rising inflation argument because you need full employment to introduce wage inflation, which in turn creates real inflation in the economy. 

The ugly stepsisters: bonds and cash

Bonds and cash, especially in the developed market, offer low nominal yields and, in many cases, negative real yields. Equities will therefore remain the destination of choice for yield-seeking capital through 2021, driven higher by the combination of fiscal stimulus, low inflation and investor sentiment. Equities might be the obvious destination; but financial advisers will have their hands full advising their clients on the right geographies, sectors and companies within sectors. “I would be investing my money in the new normal; I still believe in technology,” says Green. He suggests that financial advisers consider future growth prospects for industries rather than obsess over valuations of individual shares. 

Exchange traded funds (ETFs) and exchange traded notes (ETNs) make it possible for asset managers such as deVere to structure innovative equity exposures for your clients. One such product is a structured ETN that offers exposure to Walt Disney Co (NYSE: DIS), Alphabet Inc (NASDAQ: GOOGL) and Fiverr International (NYSE: FVRR). These shares were chosen based on analysts’ inputs to Bloomberg and assessment of these inputs by an artificial intelligence (AI) algorithm. As Green talked about the coupons, pay outs and protection barriers applicable to this ETN, it dawned on me how important it is for lay investors to seek independent, professional financial advice. The advisers’ role is to inform clients about the terms and conditions attached to complex financial products and ensure that the chosen products align with clients’ financial plans. 

Speculators chase Bitcoin to the moon!

This writer wondered why so many speculators insist on buying Bitcoin when there is so much return on offer from straightforward equity investments. It would also be interesting to know how financial advisers deal with clients who insist on adding crypto assets to their portfolios. “Whatever you do, you must remember that Bitcoin is a speculative investment, “ says Green. “If you are going to invest then it should be a small amount; you should not put your life savings in there”. There is growing consensus that digital currencies will be successful over the long term; but it is not yet clear what impact governments and regulators could have in this space. deVere believes that governments will step in to regulate crypto currencies and that such moves could have a negative impact on prices in the short term, perhaps creating buying opportunities. 

One of the webinar attendees asked what other crypto currencies were worth watching. There is a long list of options, including Dogecoin, which has surged to a billion dollar valuation despite being acknowledged as a joke. More serious speculators are considering the likes of Ethereum (XET) and Litecoin (XLC). “All of them are speculative; I cannot emphasise enough that you invest [in these instruments] with care,” warns Green. The Bitcoin debate also cropped up during a recent presentation by global equity strategist at Sasfin Securities, David Shapiro. He was asked whether he was a fan of the crypto asset following the announcement that electric vehicle manufacturer, Tesla Inc, had invested US$1.5 billion. “I do not know whether you should consider me an atheist or agnostic on Bitcoin; it is too volatile for me,” he said. He added that the crypto asset was highly volatile and could not be anchored against anything. 

Investing in the post-pandemic world

Shapiro was more upbeat on prospects for global equities. He singled out various developments as supportive of equity prices including Biden’s election as President of the US; the record amount of fiscal stimulus offered by governments worldwide; and strong Chinese and US economic growth underpinned by consumer spending. Most economists expect consumer spending to surge as the world emerges from pandemic. They say that households will free up some of their savings to purchase goods and services that were unavailable during lockdown. 

“It is a new world and if you are going to be investing you need a financial adviser who you can sit down with, talk to and benefit from the right advice,” concludes Green. He encourages financial advisers to keep a close watch for signs of inflation as this would be an appropriate time to reposition portfolios to mitigate risk. 

Writer’s thoughts:
The higher market prices go the more pressure financial advisers face from clients wanting to invest in today’s winning asset class. One of the difficulties that has emerged recently is that populism is driving prices of highly speculative assets to ridiculous levels. And your clients want in. What is best practice when advising on speculative assets like Bitcoin? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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