Welcome to our Friday mailbag edition!
Every week, we receive some great questions and comments from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
This week, we have questions on Biden’s infrastructure investment plans, Bitcoin, and the potential impact of Environmental, Social and Governance (ESG)…
So let’s get right to it, starting with one reader getting something off his chest…
Marius has very little faith in the Biden Administration’s ability to make a difference to our public infrastructure…
Yeah right! Since Bush the second, any freaking President passed in a way or in another some $1 trillion + bill for “infrastructure.”
So far, I haven’t seen any improvement. Bridges keep falling. Potholes are everywhere. And ports and airports proudly prove we are some kind of banana republic.
Only fat cats are getting fatter. I don’t hold my breath this time, either.
– Marius M.
Hi Marius. You won’t get any argument from me about the state of government efficiency – or inefficiency.
As I said in my essay, there will be a ton of red tape around the rollout of the Bipartisan Infrastructure Law.
But my goal here is to follow the money and suggest investment strategies that do the same.
And history shows that when Washington allocates more money to a sector, big players on Wall Street direct their investments accordingly.
I watch that pile-on effect very closely. I track how it relates to the distortion between financial markets and what happens in the real economy.
It’s one of the core tenets behind my investment strategies.
That’s because, even if some of the promised funds get tied up in bureaucracy, it will touch nearly every part of the American economy.
And that means there will be myriad ways to profit.
In fact, I’ve already shown my Distortion Report readers several ways to do so. Including one that could nearly double your money within the next year.
My recommendations are spread across my five investment themes – New Energy, Infrastructure, Transformative Technology, Meta-Reality, and New Money.
But they have one key thing in common – they all follow the money…
(If you’re not signed up yet, you can find out more about a Distortion Report subscription here.)
And I’ll also continue to track the money for you here at Inside Wall Street. I hope you’ll find some solace in any profits you make on the fruits of my optimism.
Next up, a few questions about Bitcoin. It’s a topic I’ve covered regularly here in the pages of Inside Wall Street.
I’ve written about how Bitcoin’s hardness makes it a great inflation hedge (along with gold)…
How the Bitcoin halvings spell opportunity for investors…
And how the White House’s recent Executive Order will help bring regulatory clarity to the crypto sector.
But a lot of folks still have reservations about Bitcoin. Some, like Verner, are skeptical…
What is the asset in Bitcoin and other cryptocurrencies that will keep growing? They look like Dutch tulip bulbs and South Sea Trader shares that depended on finding a buyer who would pay a higher price.
– Verner L.
Thanks for your note, Verner. While I don’t think anyone should pin their fortunes on crypto, I don’t believe it is a “Dutch tulip bulb,” either.
The main reason for that is the blockchain technology that underpins cryptocurrencies.
It is decentralized and immutable. And it’s not just being used as the platform for the cryptocurrencies themselves. It is now being applied across sectors from health to defense.
For example, it can help maintain accurate patient data between hospitals, diagnostic laboratories, pharmacy firms, and physicians.
In fact, global market intelligence and consulting company BIS Research estimates that blockchain will help save up to $100 billion per year in healthcare costs related to IT, operations, and support functions by 2025.
Blockchain technology is also being used for pioneering work on smart contracts. A smart contract is a self-executing computer program. It carries out a set of instructions, which are then verified on the blockchain.
Smart contracts cut out the middleman, like lawyers or real estate agents, from deals. They are already being used in areas such as real estate, financial services, and supply chain management.
Now, I agree that the best-known use for blockchain technology is the cryptocurrencies that are built on it, such as Bitcoin and Ethereum. And yes, they have had some growing pains.
But remember, cryptos have only been around since 2009. I believe the crypto megatrend is only just getting started. Yes, some of the nearly 20,000 cryptos created to date are fads.
But with the regulatory oversight that’s coming, I believe the best of those will be a feature of our financial systems for many years to come. And I include Bitcoin and Ethereum here.
And this ties neatly into the New Money investment theme I’ve been telling you about in these pages. This is where cryptocurrencies such as Bitcoin and Ethereum will continue to challenge the established financial players and fiat monetary system.
In fact, already, 40 publicly traded companies hold Bitcoin as a treasury asset. Business intelligence firm MicroStrategy (MSTR) started adding Bitcoin to its balance sheet in August 2020. Its holdings are now worth about $5 billion.
Electric vehicle maker Tesla (TSLA) holds about $1.7 billion worth of Bitcoin at the current market value.
It remains to be seen how the crypto megatrend will play out. But I believe all of this makes crypto fundamentally different from the Dutch Tulip Mania or the South Sea Bubble.
Moving on… A question from reader Ian on cryptos. For him, it’s not the cryptos themselves that he doesn’t trust. It’s some of the institutions selling them to us…
I have a question about crypto investing. Maybe more to the point, the big banks. I have been hesitant in entering into this crypto space… though I did get into four small positions in late 2017 (excluding Bitcoin, sadly).
My reluctance today is because I distrust the major derivatives players in the banking system to allow free market pricing. We’ve all seen their disgraceful games in the private markets arena, in particular. It leaves a very bitter taste going forward now that they have the OK to do the same with cryptos.
I would love to hear your thoughts on this subject.
– Ian B.
Hi, Ian. Thanks for writing in. Banks’ “disgraceful games” – as you so eloquently put it – is the reason I left Wall Street in the first place. So, I do hear you.
But despite growing volume in the crypto derivatives market, it is still relatively new. And it’s also very small, compared to the traditional derivatives market for U.S. equities.
Now, for readers new to the topic, a derivative is a financial product whose value is determined by an underlying asset. That asset can be a currency, a commodity, a stock… or in this case, a crypto.
In January 2022, trading in crypto derivatives totaled about $3 trillion. But daily trading volume in cryptos hovers around $100 billion.
Compare that to the markets for U.S. equities. In one day alone in January, trading in stock options totaled $53 trillion. (Options are one of the more popular derivatives vehicles.)
So the crypto derivatives market has a long way to go before it’s anywhere near as big.
In fact, other than Bitcoin, most other cryptocurrencies currently lack established and widely adopted derivatives markets. That’s also one of the reasons why the space is so volatile.
But as institutional investors continue to enter the space with more conviction, a derivatives market for cryptocurrencies will develop. That’s part of expansion of the broader crypto market ecosystem.
Can it become a breeding ground for manipulation by the major financial players? Perhaps. But that’s exactly why we need regulation.
Keep in mind that, as of today, no one regulatory watchdog oversees the cryptocurrency market. That’s despite the long-standing need for regulatory clarity in the space.
But whatever regulation is put in place needs to drive crypto innovation instead of stifling it. In other words, it needs to be smart.
On that note, Biden’s executive crypto order could be ushering in an era of positive regulation in the space. We could see the government help crypto instead of fighting it.
It’s too soon to know for sure, but I believe this is a positive development for cryptos. I’ll be keeping a close eye on it. And of course, I’ll report back to you in these pages with any fresh insights as the story develops.
Next, Jon wonders if we should just stick with gold and not bother with Bitcoin at all…
Why bother with Bitcoin, when you recommend both Bitcoin and gold as inflation hedges, while gold has underperformed Bitcoin for some time?
So, even if you like both, gold is the better buy today, has a much longer history, and central banks hold/buy gold and not Bitcoin.
– Jon J.
Thanks for reaching out, Jon. First of all, you won’t be surprised to hear that I agree with your comments about gold.
For most of human history, gold hasn’t had much competition thanks to its superb monetary qualities. It’s scarce. You can’t just conjure it up from thin air. It’s durable. It’s fungible; one ounce of gold is equivalent to another ounce.
These are all the reasons why humans have used it as money for over 5,000 years. There’s simply no replacement for it on the physical level. And I will always advocate holding gold, regardless of what you decide about Bitcoin.
Now, as a nascent asset, Bitcoin doesn’t have the long history that gold has. Buying Bitcoin today is a speculation that it will be the money of the future. This is an excellent bet. Its path makes it a component of the New Money trend I follow.
And for all the reasons I outlined earlier this year, I believe gold and Bitcoin are fundamentally perfect companions.
As well as this, Bitcoin gives us a shot at enormous upside potential. Today, it trades around $40,000. But as recently as November 2021, it was up around $69,000. And I believe the Bitcoin story still has a long way to run.
So, yes, I recommend holding both gold and Bitcoin. For all their differences, they share one critical common theme – they both represent a sound alternative to the fiat currency system.
I favor a mix of gold and Bitcoin, heavily skewed towards gold. The more risk-tolerant you are, the more Bitcoin you may be able to handle.
And finally, Vaughn poses an interesting question…
May I ask what your take on the impact of Environmental, Social and Governance (ESG) is? This is related to my fears of the ESG rating system being brought down to the level of the individual and then programmable digital currency being a political weapon. Thank you for any thoughts you may have on this.
– Vaughn C.
Hi Vaughn, thank you for that excellent question. I think it’s important for companies to hold themselves to a high standard with respect to ESG (or environmental, social, and governance) metrics. High ESG ratings can be a sign of a better, fairer corporate strategy.
Of course, companies can sometimes position themselves specifically to get high ESG ratings without necessarily embodying what these ratings are supposed to be about.
I’m on the advisory board of an organization called Ethical Markets. It strives to make sure companies are behaving in a way that corresponds to their ESG ratings.
At Rogue Economics, we look for this in companies across our five distortion themes, but especially in the New Energy space.
As for programmable digital currency, central bank digital currency (CBDC) will be a topic of increasing conversation and interest among central banks and governments.
Centralized control over money creation, whether in paper or digital form, does mean more power for those that can create it – or who have more of it – than others.
That said, I don’t see ESG metrics being used for individuals. We are all too different.
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition. I do my best to respond to as many of your questions and comments as I can.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins