Crypto: Your Questions Answered

A Look at the Markets: S&P500

The S&P500 index is likely to close November around all-time highs. However, there’s a possibility of heightened volatility or downward sales pressure next week, which coincides with the beginning of December, due to tax loss harvesting.

Tax Loss Harvesting

Tax loss harvesting is a strategic investment technique where investors sell underperforming securities at a loss to offset capital gains and reduce tax liability. By realising losses before year-end, investors reduce their tax burden while maintaining their investment strategy. This practice enables businesses and individuals to use investment losses for tax-efficient financial management. After 30 days, investors can repurchase the stock, or a similar one, while retaining the tax loss benefit.

Harvesting

Note: harvesting comes from agricultural use.

Harvesting - noun - uncountable - the activity of picking or collecting crops, or of collecting plants, animals or fish as food.

Harvest - noun - countable - the time of year when crops are cut and collected from the fields, or the activity of cutting and collecting them, or the crops that were cut or collected.

Crypto: Your Questions Answered

Before we dive into the crypto questions, I believe it’s crucial to explain my interest in discussing cryptocurrencies in these newsletters.

Am I a crypto maximalist? Absolutely not.

A crypto maximalist is an all-in investor, often allocating most of their investable income to the sector.

I prefer a more balanced portfolio with stock ETFs, bonds, and individual stocks. Cryptocurrency makes up a small portion of my portfolio, and if it were to disappear entirely, it wouldn’t significantly impact my financial situation.

So, why do I talk about crypto?

These newsletters take a long-term perspective on the market, and I believe that includes cryptocurrencies. In other words, crypto has become an integral part of macroeconomics. If you believe this is true, it becomes impossible to ignore.

I understand that some investors may not be fans of cryptocurrencies. However, it’s important to remember that the market doesn’t care about individual opinions. It reflects the collective opinion of the market (the hive mind).

By the way, it’s perfectly acceptable to not invest in something if you don’t believe in it or for ethical reasons, even if you believe it could be a profitable trade. For instance, I don’t invest in tobacco companies because of the health risks associated with smoking.

As always, this information is not financial advice. I never provide financial advice because each reader’s personal situation, risk tolerance, and goals are unique.

Your Questions

1. How do I Buy Cryptocurrencies?

For large amounts, I suggest using a cryptocurrency exchange like Coinbase, Kraken, or Binance. Unlike stock brokers, these exchanges are not regulated, so choose carefully.

Another important factor to consider is comparing fees and spreads. Spreads are the difference between the buy and sell price, and larger spreads mean customers pay more for their cryptocurrency. However, this isn’t always apparent from just looking at fees.

For smaller amounts, you could consider using a Fintech company that offers digital banking services, like Revolut. However, it’s important to note that Revolut doesn’t allow self-custody of crypto. I don’t recommend this for long-term investing because you have to trust these relatively new Fintech companies to hold your investments.

2. How do I store cryptocurrencies?

The phrase “Not your keys, not your coins” underscores the significance of self-custody in managing cryptocurrencies. Unlike leaving them on an exchange like we would with stocks, self-custody involves taking ownership and responsibility for your digital assets. However, it’s crucial to note that stock exchanges are regulated, while crypto exchanges lack such oversight.

To store cryptocurrencies, investors have various options, including digital wallets and physical wallets.

• Hot Wallets: Connected to the internet, hot wallets are convenient but less secure. Examples include mobile apps like Trust Wallet and online wallets like Coinbase.

• Cold Wallets: Offline storage options, such as hardware wallets (e.g., Ledger, Trezor) or paper wallets, offer greater security against hacking risks.

Most investors agree that cold wallets are the safest choice. However, it’s essential to remember that access to the wallet is solely your responsibility. Wallets come with a set of security keys that must be stored safely. If you lose access to your wallet, there’s no one you can contact to regain it, and your cryptocurrencies will be permanently lost.

3. What about Bitcoin ETFs?

If the extra difficulties of buying and storing cryptocurrencies are worrying for you, you could consider a cryptocurrency ETF. In Europe, these are typically known as ETPs (exchange-traded products).

I will write about the differences between buying Bitcoin (as an example) and a Bitcoin ETP in next week’s newsletter.

4. What is the Bitcoin Cycle?

The typical Bitcoin cycle can be broken down into four stages and, historically, has taken place across four years:

1. Accumulation Phase: This phase occurs after a significant bear market or a price correction. Prices stabilise, and investors start accumulating Bitcoin at relatively low prices, which helps establish a price floor.

2. Bull Run Phase: Following the accumulation phase, Bitcoin enters a period of strong price appreciation, characterised by increasing investor interest, media attention, and new market participants. This phase often sees rapid price increases and can be fueled by factors like institutional adoption, positive news, or market speculation.

3. Market Top and Correction: At some point during the bull run phase, Bitcoin reaches a price peak, resulting in high levels of market exuberance. This can lead to a period of price correction or a market crash as profit-taking and sell-offs occur, causing prices to decline.

4. Bear Market Phase: After the market top and correction, Bitcoin typically enters into a prolonged period of price decline and consolidation. This phase is known as the bear market and can last for months or even years. During this period, investor sentiment is generally negative, and prices may continue to decrease until a new accumulation phase begins.

It's important to note past performance does not guarantee future results.

5. What is FOMO?

FOMO stands for "Fear of Missing Out." In crypto, it refers to the emotional urge to buy into a rising market to avoid missing potential gains. It can lead to impulsive and poorly timed investments.

Note that I’ve discussed cryptocurrencies throughout the entire crypto cycle. I don’t intend to solely focus on this sector during a bull market, as I don’t want to encourage potential investors to make impulsive investments without conducting thorough research.

6. What is FUD?

Fear, Uncertainty, and Doubt (FUD) is a deliberate spread of negative information or rumours to instil fear among investors in a specific asset or market. In cryptocurrency markets, FUD can cause panic selling and significant volatility.

Just as with FOMO, educating yourself is the antidote to FUD.

7. Why has the value of cryptocurrencies just gone up?

As we’ve discussed in previous newsletters, markets and cryptocurrencies, in particular, responded positively to Donald Trump’s reelection as the 47th President of the United States. Investors believe that Trump will create a more favourable regulatory environment for cryptocurrencies and has pledged to establish a US Bitcoin strategic reserve.

However, it’s important to remember that Trump also poses risks. For instance, the Bitcoin strategic reserve may not materialise. Additionally, Trump has expressed interest in removing the independence of the Federal Reserve, which could have adverse effects on the markets. In addition, some of his policies such as raising tariffs and removing migrants may be inflationary.

8. Is it too late to buy?

This is an impossible question for me to answer, and I do not provide individual trade recommendations in these newsletters.

If you are feeling FOMO (Fear of Missing Out), it’s essential to pause and reassess. Emotional investing—driven by FOMO or FUD (Fear, Uncertainty, and Doubt) - can often lead to poor decisions and potential losses.

Historically, the ideal time to invest in Bitcoin has been during the late stages of a bear market, when prices are typically lower and sentiment is more subdued. However, it’s important to note that no one can predict whether the next bear market’s lows will be higher or lower than the current price.

Investing in cryptocurrencies requires careful consideration and a solid understanding of the market. Many experts suggest dedicating at least 100 hours to studying cryptocurrency markets, technology, and trends before making any decisions. This research will help you decide if, when, and how to invest based on your own goals and risk tolerance.

Conclusion

As always, this information is not financial advice. It’s intended to spark your interest and encourage you to conduct your own research if you wish. Remember, always invest based on your own unique circumstances, risk tolerance, and financial goals.

‘Tariff’ is ‘the most beautiful word in the dictionary’

Tariff - noun - countable - a tax on goods coming into or going out of a country

Former President Donald Trump, a strong advocate of tariffs, has repeatedly emphasized their significance in his trade policies. In a recent Truth Social post, he reaffirmed his commitment to imposing high tariffs if reelected. This announcement caused market reactions, particularly weakening the Canadian dollar against the Euro and British pound.

Implementing tariffs could disrupt supply chains, especially in the auto industry, as many parts for U.S. car manufacturing are sourced from Mexico. This vulnerability resembles the challenges Brexit caused for the United Kingdom, disrupting trade and logistics with the European Union.

However, Trump’s post may not indicate immediate tariff implementation. Instead, it could be a strategic move to pressure Canada and Mexico into stricter border controls or renegotiated agreements. By threatening tariffs, Trump aims to assert U.S. influence in regional trade while maintaining policy flexibility.

Tariffs can be a powerful tool, but their impact on industries and international relations underscores the delicate balance in global trade. Many commentators see tariffs as inflationary. Businesses dependent on cross-border supply chains should prepare for potential disruptions.

Perhaps “tariff” will only be ‘the most beautiful word in the dictionary’ if they are never implemented?