Personal Finance

Bitcoin Price Tag

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Posted by Brent Woyat

on Thursday, 21 December 2017 12:13

Is it possible to put a value on Bitcoin? The geeky economist in us is inclined to say that we can, but the real world is often more complicated than models allow. Nonetheless, we set about the valuation challenge by asking a relatively simple question: “what if Bitcoin were to replace the US dollar (USD) as the world’s reserve currency?” We ask that question because on one simplistic level Bitcoin is a fledgling currency, so perhaps we should aim to value it as such. Fledgling is the key word here though, there are many impediments to Bitcoin growing up and successfully becoming the world’s reserve currency, so we must probability adjust the price accordingly. When we do that, we conclude that Bitcoin is already overvalued. To buy from here, you need to forget about the price tag, because it is not about the value.

Our simple question assumes that Bitcoin is a currency, but it does not yet have all attributes required to be a cash alternative, and it is also competing with equally compelling solutions to grow into that space, so we should probably value it at a discount to cash. Just as was the case during the “dot com” mania of the late 1990s, Bitcoin is an exciting investment opportunity for speculative investors. It may or may not survive, but just as we would struggle to imagine a world without the internet today, we suspect that in ten years’ time a world without the blockchain will be equally unimaginable. In many ways, it is the blockchain which is the more interesting story.

Let’s begin by recognizing that not every investment conforms to the standard model. Take equities for example, the most common method of valuation is to discount the expected future dividend payments from a company to arrive at a theoretical valuation based on the net present value of all future cash flows that return to the investor. That view came under significant pressure through the “dot.com” era, where many internet companies achieved large stock market valuations without making any profits, let alone returning dividends to shareholders.

Today, we no longer flinch when considering a company with a market capitalization of $560bn that has never paid a dividend, and reports earnings that are so low it has a Price to Earnings (PE) ratio at around 300x (wider US market at 22x). All that said, this company (Amazon) has enjoyed almost exponential price growth. Some assets are simply worth what someone else is willing to pay for them. A fiat currency is similar, but without a balance sheet of tangible assets behind it.


If we were to compare the market capitalization (shares outstanding times share price) of Amazon to Bitcoin market capitalization (number of coins times price) then Bitcoin has roughly half the market capitalization of Amazon (Figure 1). The most shocking element of that chart, however, is the speed at which Bitcoin has achieved this. No wonder the speculative interest in Bitcoin. Amazon is one of the successful survivors of the “dot.com” boom, there are plenty of companies that just didn’t make it – remember using Netscape?

The point is this, Bitcoin may have had an impressive start, so did many of the dot.com companies, but in this fast-moving world of cryptocurrencies, there are many other candidates that could dominate over Bitcoin. Ethereum, Ripple, Litecoin, and Bitcoin Cash are all existing contenders for cryptocurrency supremacy, and there are almost certainly other candidates waiting in the wings, perhaps even a few state sponsored alternatives. Would a cryptocurrency backed by a sovereign nation be more or less attractive than Bitcoin? Whatever the answer, each of the competing currencies should have a discount applied to the true value of a successful solution.

To value Bitcoin, we really want to compare Bitcoin to money. To do that, we should first define what we mean by the term money. That might seem like a silly endeavour given that we all use money every day - we are all intimately familiar with it. Nonetheless, we think it is helpful to define money as a medium of exchange, which is also a store of value and a unit of account – the traditional economist definition. The medium of exchange is straightforward, something that can be exchanged for goods and services. In some way the next two attributes follow from the first in so far as money also must be recognizable with an agreed value, hence the “store of value,” which is also likely to mean it should have a relatively stable value over time.

That last point is important because money, as a store of value, can be used to separate transactions in time. If that were not the case, money would just be an intermediate step in a barter system where all transactions occur simultaneously – not that helpful. Finally, the unit of account simply allows us to express the value of something using money. In a barter system, one haircut might be worth a dozen apples, but in a money system, it can simply be priced as $10. When money functions as a unit of account, it also facilitates credit – much easier to borrow $10 than it is to borrow a haircut. So money has a number of attributes that make it useful, perhaps not all of those attributes are obvious at first glance.

Unlike money, which has a physical form, Bitcoin is held by the user in an electronic wallet that has a Bitcoin address (actually many of them), much like an email address, each of which are unique, and then shared with other parties to send or receive Bitcoin (to make transactions). Unlike traditional money where transactions are checked by banks, Bitcoin transactions are checked and verified on what is called the blockchain. This is a distributed public ledger upon which the complete Bitcoin network relies and its integrity is protected with cryptography. A transaction is therefore a successful transfer of Bitcoin between two Bitcoin wallets that has been verified by the blockchain using a process called mining – a competitive lottery that prevents individuals being fraudulent. In many ways, it is the blockchain technology that is more interesting than Bitcoin, as it has a massive disruptive potential to any industry that relies on record keeping, but that is a note for another time.

So, does Bitcoin meet this definition of money? Perhaps the fairest answer is to say that it has the potential to do so, but not just yet. Bitcoin can in some circumstances be used to purchase goods and services, although it is still a long way from being ubiquitously accepted as a means of payment. The city of Arnhem in Holland has a particularly dense population of vendors (including Burger King and Spar) that will accept Bitcoin, but this has been driven by a small group of enthusiasts that have promoted it tirelessly within their community since 2014. There are not many other similar examples. One obvious problem for Bitcoin in becoming more widely used as a medium of exchange is price stability, and that is clear from Figure 1, the value of Bitcoin is far from stable. Given the exponential rate at which the value of Bitcoin has grown over the past few years, consumers now have expectations that it will continue in the same way, they are therefore unlikely to want to part with Bitcoin in exchange for goods and services – a classic deflation problem. The price of almost any good or service in Bitcoin today is almost 2000 times cheaper than it was a year ago. Why buy today when tomorrow it will be cheaper? It is this very same problem, however, that attracts the speculative investors, but can they justify the potential value of Bitcoin rising still further?

Bitcoin is not quite a money alternative insofar as it is not ubiquitously accepted as a means of transaction, and it is not yet an effective store of value. Anything that can appreciate by 2000% over a year must have the potential to fall by the same, so it cannot really be relied upon as an intertemporal separation between purchase and sale. Once the price of Bitcoin settles down, and the mania subsides, then maybe it will move further into the realm of money, but until then, it should be priced at a further discount to that of cash. Perhaps it is fairer to compare Bitcoin to gold, so we make both comparisons below, starting with the assumption that Bitcoin can completely replace US dollars and then gold.

In figure 2, we chart the market capitalization of Bitcoin, all cryptocurrencies, USD M1, and financial gold. The US money supply, defined as notes and coins plus cash money balances at banks (M1) is worth just less than half of the total value of all gold above ground, but slightly more than what we have called financial gold. Financial gold is the gold held for investment purposes in bars, coins, ETF’s and by central banks as currency reserves. We ignore the rest because Bitcoin could never be a gold substitute in jewellery and other industrial applications because it has no physical form. Comparing Bitcoin to the US money supply is therefore the most favourable comparison for Bitcoin given that it is just over 12 times smaller than the US money supply. If Bitcoin were to replace US dollars in M1, then it could be worth 173,000 dollars a coin at the theoretical maximum supply of Bitcoin. That’s quite some headroom for further gains in Bitcoin, but then we have not yet considered how to discount Bitcoin appropriately relative to USD to take account of the hurdles ahead of it in replacing USD as the world’s reserve currency.


Before we consider the discounting of Bitcoin against the potential value in replacing USD in M1, we should first recognize that it is quite unlikely that the US dollar will disappear entirely any time soon. Central banks earn a fee from printing coins and cash, and are unlikely to give that up (seigniorage). There is also a libertarian argument to say that individuals should be free to conduct their business without anyone else interfering or even knowing about it. Bitcoin addresses the privacy part of that to some extent, but then it was only recently that many US citizens thought they had asset privacy via offshore Swiss bank accounts. So perhaps a tighter assumption about replacing USD is that Bitcoin could possibly replace half of the money stock in M1. On that assumption, Bitcoin could be worth $86k per coin in the future – a five times uplift in valuation from here.

As already discussed, however, Bitcoin is not the only cryptocurrency solution out there, and there will surely be more to come. We should apply a discount to the theoretical dollar replacement value, but what should that be? Well we have listed four alternatives to Bitcoin above, but there are 100 alternatives listed on coinmarket.com. Let’s keep things simple and say that Bitcoin has a 1 in 2 chance being the eventual winner based on the market capitalization of Bitcoin, relative to the total market capitalization of cryptocurrencies that exist today. That would take our hypothetical value down from $86k to $43k, still more than 2.5 times the present value of Bitcoin.

There are of course other risks to Bitcoin. What about other solutions that have yet to present themselves, perhaps even a state sponsored solution? If there were a 20% chance of a state sponsored cryptocurrencies surpassing Bitcoin, then the hypothetical value falls to just twice the current traded value of Bitcoin. That is all before we consider that Bitcoin is far from universally accepted. To gain more mainstream acceptance as a medium of exchange it is needs a much higher level of vendor engagement, and that will be difficult to achieve because no vendor wants to accept a currency mismatch – dollar costs and Bitcoin revenues – without hedging which is not free. Then we have the problem that Bitcoin does not quite function as a store of value. What about the possibility of other countries (not just China) outlawing Bitcoin exchanges? Applying a further discount to these issues, most likely more than 50%, takes us below the market price for Bitcoin.

Essentially, to see value in Bitcoin from here, you would need to see the probability of Bitcoin replacing 50% of the US dollar notes and coins as being greater than 1 in 5. That seems like a stretch to us. It really is all about the price tag, and this one is way too volatile to be anything other than a speculative play. Like all manias, there needs to be a good story, and Bitcoin is no different, the blockchain is here to stay, but to buy into Bitcoin at these levels you’d, “…need shades on your eyes and heels so high….”, and to, “…forget about the price tag.”


Brent Woyat, CIM, CMT

Investment Advisor, Portfolio Manager

Canaccord Genuity Wealth Management

T: 604.699.0869 | F: 604.643.1802

www.brentwoyat.com www.retiretoday.ca

All information is given as of the date appearing in this document and Canaccord Genuity Wealth Management (CGWM) does not assume any obligation to update it or to advise on further developments related. All this information has been compiled from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it do CGWM assume any liability.

All views expressed in this document are provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities. The statements expressed herein are not intended to provide tax, legal or financial advice, and under no circumstances should be construed as a solicitation to act as a securities broker or dealer in any jurisdiction. All views are intended for general circulation to clients and do not have any regard to the specific investment objectives, financial situation or general needs of any particular person.

Forward-looking statements and past performance are not guarantees of future results. To the fullest extent permitted by law, neither CGWM nor its affiliates or any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of the information contained in this document. Canaccord Genuity Wealth Management in Canada is a division of Canaccord Genuity Corp. Member – Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. 


Personal Finance

Anyone Can Invest!

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Posted by Brent Woyat

on Wednesday, 22 November 2017 17:13

monopoly manHave you ever played the game Monopoly? If so, you’re probably familiar with the image of “Rich Uncle Pennybags,” the game’s unofficial mascot. Sporting a bushy white mustache, a black top hat, and a cane, Mr. Monopoly (as he is sometimes known) has become a cliché. Created as a caricature of J.P. Morgan, the legendary financier, Pennybags serves as a kind of stock image for the ultra-wealthy investor. 

Thanks to this and other stereotypes, some people seem to think that investing is a game for only the super-rich to play. But you don’t have to own a huge pile of cash to invest. That’s because investing isn’t about “playing the stock market.” It’s not necessarily even about getting rich. No, investing is about building for the future. It’s about compounding the money you already have so that you can afford to reach your goals in life. 

No matter who you are or where you come from, everyone has financial goals. Your goal could be to save for retirement so that you don’t have to work forever. It could be to help your children attend college. It could be to build a new house, open a business, or travel the world. It could be all those things and more. But achieving those goals costs money, and that’s where investing comes in. 

Nowadays, most people—even those with high-paying jobs—simply don’t earn enough regular income to achieve all their goals. It’s not enough to store your money under the mattress. Nor is it enough to put your money in a bank and rely on interest. In the 21st century, your money has to grow. It has to work for you. It has to outpace inflation. The good news? All of that can be accomplished through investing. 

People often ask me, “So how can I invest if I don’t have a huge pile of cash?” Fortunately, there are many ways. While I certainly wouldn’t recommend any one specific approach without understanding your personal financial situation, here are a few ways to get started:

Ÿ Set up a Tax-Free Savings Account (TFSA), which aside from allowing you to invest, also comes with specific tax benefits.

Ÿ Participate in your employers Defined Contribution Pension Plan or Employee Stock Purchase Plan.

Ÿ Invest in an index fund, which allows you to “match” the investments held in a market index, like the S&P/TSX 60 or S&P 500. Index funds are both simpler and less costly than most other types of funds, and can also help you diversify your portfolio. (See point #2 below.) 

Doing any of these things allows you to:

1. Start small. You don’t have to invest a lot of money all at once. Even a little bit is better than nothing, because once you’ve invested, your money can start growing and compounding in value. 

2. Invest in broad sections of the market. This is valuable because different industries or types of investments do better than others at different times. By participating in an index fund, you can effectively invest in several areas at once rather than relying on one specific investment to do all the work. This is known as “diversification.”

3. Save for the future. As you know, so many of the financial decisions we make are based on short-term needs. Meanwhile, our long-term plans are ignored. But by investing wisely, you are actively determining what tomorrow will be like…today! 

Of course, it’s not enough to simply invest. To reach your goals, it’s even more important to invest wisely. That’s why it’s sometimes a good idea to seek out the advice of a qualified financial advisor. With an experienced advisor, you can get unemotional, educated insight into how to invest properly. 

But the most important thing to remember, is that you don’t have to wear a top hat or own a hotel on Boardwalk to invest. And because you can invest, you don’t have to wait another day to begin working toward your goals in life. So go out and start determining what tomorrow will look like…today!

Brent Woyat, CIM, CMT

Portfolio Manager




Personal Finance

Pay Down Your Mortgage

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Posted by Jared Dillian - The 10th Man

on Thursday, 16 November 2017 16:05

The-Best-Strategy-To-Pay-Off-Your-Mortgage-EarlyThe latest issue of Street Freak came out on Tuesday. Street Freak is a bit of an aggressive stock-picking newsletter, where we come up with a new idea every month. I try to keep the ideas a secret—if you want them, you have to subscribe! But I’m going to let you in on this month’s idea for free. Are you ready? Here it is:

Pay down your mortgage.

Yes, that’s a bit unorthodox for a financial newsletter. But people spend too much time thinking about the next get-rich-quick idea and not enough time thinking about their overall financial well-being. I’m willing to bet that in addition to having a successful portfolio, many investors reading this also have a lot of debt.

Going into what might be a downturn, I’m uncomfortable having a lot of financial leverage. If you think the market is going to go down, then you should stop thinking about buying inverse VIX ETNs and start thinking about how to deleverage in a smart fashion.

Better Risk-Reward

Paying down your mortgage is part of that. It is part of an overall exercise in balance sheet repair, which includes—

  1. Building a cash position
  2. Paying off debt:
    1. Margin debt
    2. Credit card debt
    3. Car loans
    4. Mortgage debt

Financial leverage cuts both ways. It can help you on the way up, and it can hurt you on the way down.



Personal Finance

Don't Leave Me This Way

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Posted by Brent Woyat

on Thursday, 26 October 2017 18:04

For those wondering "how long" the US equity run can continue - this is a very insightful piece of analysis from our in-house team. ~ Brent Woyat

As the great and the good in the world of economics and policy-making gather for the joint IMF and World Bank annual meetings in Washington this weekend, you may think they would be in a congratulatory mood given the synchronized positive growth in the global economy. Ahead of the meetings, the latest IMF economic projections point to a pick-up in global economic growth to 3.6% for this year and 3.7% for next, from the 3.2% growth in 2016. Moreover, the current global economic acceleration is broad based with all major regions and countries projected to grow this and next year. There are no signs of this economic expansion coming to an early end.

Even though the macro back-drop keeps improving, we can’t help but notice the polarization of views about equity markets. Notably, the focus on market valuation, sentiment and whether or not an equity market correction is overdue given the strong rally since 2009. We highlighted in previous Strategy Notes that equities are not cheap anymore, but they are not prohibitively expensive either. Indeed, investor sentiment indicators seem evenly balanced between bullish and bearish, and net mutual fund and ETF flows this year have favoured bonds over equity – hardly a signal of complacency. So what of the possibility of a market correction? Well that would seem likely at some point, we’ll probably see a few before the peak of this cycle, but the possibility of a major bear market does seem remote right now.
That is, the bigger picture here is that most bear markets in the US have coincided with a US recession – at least when looking back over the past fifty years. We don’t see the excesses in the economy that indicate a recession is likely in the short term. Indeed, most recessions in the US have occurred as a result of an over tightening of interest rate policy by the central bank. At the moment, the US Federal Reserve is approaching policy normalization in a cautious manner. The other two major causes of a US recession have been the oil price hikes in the 1970s and a bursting of a credit bubble in 2007. Presently, we do not foresee the price of oil rising to such a level or a severe credit event which might cause a recession. In addition, the strong US and global purchasing managers surveys point to a continuation of the positive economic momentum in the near term.

Given the economic and market uncertainties, a dilemma for some investors is either to participate in what they view as an over-extended stock market or wait for a more opportune time to invest. We would highlight that it is difficult to pinpoint the top of the market and crucially, that most bear markets take time to manifest themselves. This presents opportunities for investors. Provided the next recession is more than three months away, typical returns over the next six months would be positive, based on our analysis of US equity market returns over the past 50 years.

Figure 1 highlights the 7 bear markets in the S&P 500 Index over the past fifty-five years. We have defined a bear market as a fall of more than 20% or more in the Index based on weekly data. Most bear markets have coincided with a recession with the exceptions of 1966 and 1987.


Figure 2 highlights that most bear markets take time to correct. On a median basis, bear markets last 18 months with the shortest being 7 months (excluding the 1987 bear market) and the longest 21 months. Moreover, while the eventual percentage drop in a bear market is substantial, they are often accompanied by volatility in the initial period and thus take time to develop.


Figure 3 highlights the median losses in the initial periods following the start of the bear markets. The median losses were -4.7% and -7.7% after three and six months respectively. Moreover, if we consider the returns including the three and six months prior to the start of the bear market, then the losses tend to be minimal. The median return was -1.9% for the period between the 3 month prior and 3 month after the start of the bear market. On the six month window either sides, the median return was actually positive at 1.6% over the period.


So what does all this mean for the investment decision today? Essentially we believe that investors should be positioned for growth in a well-diversified portfolio. In the words of the Communards, “don’t leave me this way.” It is too early to capitulate, based on our assessment of markets and the economic cycle.

Brent Woyat, Canaccord Genuity



Personal Finance

Top Ways To Avoid Losing Money In Forex Trading

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Posted by Marc Faber - Gloom Boom & Doom Report

on Thursday, 26 October 2017 05:55

"Forex Trading" is increasingly gleaning a lot of attention off lately, and one of the primary reasons behind this is that it lets people earn a handsome income. With some research and comprehension of how trading works, one can generate a steady flow of second income by spending a few hours on trading every day. But, as "Forex Trading" involves speculation of the price movement of the foreign currency pairs, a certain amount of risk is always involved in it.
The traders who don't follow the right strategies or trade wisely may even lose the money in this type of trading. Thus, here we have listed some of the best Forex trading best practices that can help you in minimizing your losses and maximizing the profits.
Treat Forex Trading As A Business
One of the key strategies for achieving success in Forex trading is to treat it as a business. Always remember that the short term wins and losses don't matter, but, how your trading business performs in the long run is important. 
Like any other business, profits and losses are a part of the business, and it takes a lot of planning, staying organized, setting realistic goals and learning from both, failures and losses will ensure a long and successful in the forex trading.
Finding Entry and Exit Points 



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