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At least in the Dutch Tulip Mania, when it all came crashing down, you had a pretty flower. Granted, the bulb was no longer worth the price of a fashionable Amsterdam mansion (including carriage house and garden), but your spring would have been a little more beautiful.
The same cannot be said of the crypto bubble.
As this odd financial behavior plays out, let's review some keys points.
Keep in mind that one of the underlying premises, or fears, driving this bubble is well-founded. The United States government is trying to deal with an increasingly high debt load, and the way it has and likely will try to mitigate that liability is by inflating at least some of it away by debasing the dollar. But there are better ways to protect yourself as an investor (mainly by owning businesses) than resorting to coin-land.
One of the beautiful things about investing is that you do not need to swing at every pitch. This is not baseball. You can let pitches sail right through the strike zone, and there is no harm done. People make money all kinds of ways. In 2024, Bitcoin is up a lot. That's fine, and that's wonderful for Bitcoin holders, assuming their coin wasn't lost or stolen.1 But it does not mean you have to get on board.
So let's step through a few reasons why, when your nephew pontificates on the wonders of crypto at your holiday get-together, you are going to just let it roll.
1. Notice the currency used when everyone quotes coin prices. Do they quote it in Bitcoin? No. Do they quote it in Ethereum? No. They quote it in U.S. dollars, because U.S. dollars are the universal standard that everyone, well most people, trusts. Universality and trust are key elements of a currency. There is so much irony in the fact that they use dollars to quote their coins.
2. Don't be fooled by the tech nature of this bubble. What is happening here is the crypto promoters are acting as if the technology is some useful thing that sheds value onto the coin as an investment. Venture capitalists are actually decreasing their investments in blockchain and crypto, as after 15 years, use cases are just not showing up.2 The VCs had a period of time years ago where they couldn't find the next tech wave, and they blew oxygen onto the crypto fire, but now that they have found useful artificial intelligence, they are moving on. (To be fair, crypto does have some "use" in facilitating illicit transactions.)
3. So if you don't need the fancy veneer of software to market the underlying coin-which-has-almost-no-function, why are we using roughly 2% of the nation's energy to mine these things? If we are going to trade something around that is of fixed quantity (not all cryptocurrency is of fixed quantity), why not just, say, put 10,000 unique glass spheres in a box, start the trade at X value, and say "have at it folks, convince other people to pay you more for your unique glass sphere. The dollar might depreciate but we are not going to inflate away the 10,000 spheres."
I suspect over time a few of these coins will stay around, roughly serving a function similar to gold. The majority likely will fade away to zero. I could be wrong. I don't really care if I'm right or wrong though, because I believe there are better, more understandable opportunities in indexing.
Dan Cunningham
p.s. Get those financial New Year's resolutions ready! Unloading expensive financial products and managers is a great way for you to fight inflation.
1. NBC News 9/10/24: Crypto scams stole $5.6 billion from Americans last year.
2. Galaxy Research 10/15/24: Crypto & Blockchain Venture Capital Q3 2024
To their credit, iBonds do have a clever name. They have the "i" tucked on there for "inflation," and they are riding the coolness coattails of Apple products. So the naming team deserves credit!
For the most part we don't recommend iBonds, but they're not confined to the annuity-whole-life-insurance bin of despair either. They were popular in 2022 given their 9%+ rates of return. Let's look at them now, and also what can be learned from the past two years.
iBonds have a unique construction in that the rate changes every six months, largely in sync with inflation. So they accomplish a dedicated purpose - they are an inflation hedge. In our complex world, a simple product that serves a dedicated purpose gets kudos. They have the benefit that the counterparty is the United States government, and therefore doesn't have lots of other unstated motives. (This can be a problem in the corporate bond market.)
So did people make that juicy, risk-free 9%?
Yes sort of.. and then quickly no.
To parse that sentence, the "sort of" is because the interest rate is federally taxable if the product is held in a taxable account. So you have to take the 9% down by your federal tax rate. This is better than CDs or money markets held in taxable accounts; those products are federally and state taxable.
And the "quickly no?" That is because as inflation fell, after the first few payments the bond coupons reset to lower levels. The bonds that were bought in October 2022, while initially paying over 9%, are now paying 1.90%. Apparently that is above inflation, although don't tell anyone who actually goes to a grocery store.
This is called interest rate risk, and I was warning clients in 2022 and 2023 to take it seriously. It affects short-term bonds, CDs, and money markets in particular. It's important to recognize the collapse in payments from the October 2022 iBond just two years later. It was nothing like locking in a 30-year Treasury bond in September 1981 above a 15% rate.
Here is the full chart of iBond rates. The rate depends on the date the bond was purchased, as a portion of the coupon is fixed for the life of the bond:
https://www.treasurydirect.gov/files/savings-bonds/i-bond-rate-chart.pdf
Dan Cunningham
Sources: iBond 2022 rates and tables:
https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart
I apologize for missing a newsletter. I'll make it up to you in the next few months with a bonus, I promise. Sometimes these newsletters are real doozies but every now and then there's a nugget of insight.
In September, One Day In July blasted through a billion dollars under management. We're excited about this. To everyone who helped by trying to spread the low-cost indexing mission to family and friends, thank you. Your words add real credibility for others.
There is a perception that good investing is dependent on consuming more information, and distilling that information. That was true in the 1970s and 1980s, when a small fry named Mike Bloomberg was getting started. Mike had the insight that information was the scarce commodity on Wall Street, and built a computer operating system to deliver that information in a fast and stable fashion (no CTRL+ALT+DELETE for him). Then he named the computer after himself, the "Bloomberg Terminal." He kind of liked that vibe, so he continued naming buildings after himself all over the nation's university campuses.
Today many people extrapolate that insight forward. But information is not the scarce commodity today that makes an investor successful, discipline is. There is lots of information and probably a lack of discipline as trading volumes surge.
Discipline, and lack of emotion, is a bedrock principle for good investment performance. But even better than lack of emotion, as Jason Zweig pointed out this May in the Wall Street Journal, is inverse emotion: "Buffett isn't unemotional; he is inversely emotional. He takes other people's feelings, turns them inside out and makes the resulting emotions his own." (1)
This is harder to do than it seems. Nothing in a normal childhood trains you to be the oddball. And certainly in the investment field, that group, who might perform well, is going to struggle to get clients because they seem different (when in reality, you want different). Most Americans will hand over their life savings to "the nice guy" at a big brand firm, before they will take the perceived risk of hiring someone who displays inverse emotions.
(As a side note, they're all "nice guys." You'd be nice too if you were being paid tens of thousands of dollars per client per year at a big firm to underperform the indexes while you play golf.)(2)
I don't want to give all of our secrets away to our golfing competitors. But to recap, these three ingredients must get structured into an investment strategy, and an investment firm, in a systematic way or you likely will end up with sub-optimal results:
Dan Cunningham
1. What Our Brains Know About Stocks - but Won't Tell Us - WSJ, 5/24/24
2. I should note that not every client is paying this amount at those firms.
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