Crypto Crash

May 22, 2021 | Investing

This week’s podcast focuses on the wild volatility in the cryptocurrency markets. Is it just another dip in a bull market? Or, is the run over?

Welcome everybody. Welcome to the podcast. This is Karl Eggerss, and this is creating Richer Lives. (210) 526-0057 is our telephone number if you need anything from us, needed to ask us a question, we are here to help you. Also our website, creatingricherlives.com. That’s creatingricherlives.com and just want to give a shout out to all those that participated in our webinar this past week. It was for those people that are under 65 years old and looking at what their health insurance options are. Some of you are retiring before the age of 65 and a ton has changed. So we did that webinar, if you missed it or didn’t know about it, then you can go right in the show notes of this as we transcribe every single podcast and I’ll have a link down there and you can actually watch it on the replay. If you want to do that. Some of you have called me this week, wanting that.

So we’re going to continue our webinars series, by the way, with a lot of different topics, everything from alternative investments, that’s one we’re working on right now, to things like cryptocurrencies and trying to get some guests for that from some institutions. So stay tuned, I think it’s a great way for you to participate and gets questions asked and it’s very interactive because there’s a chat. So you can ask questions to the guest right there, ask questions to me right there on the spot and it’s done in the comfort of your own home.

However, I will say, speaking of comfort of your own home, many of you are wanting to get back out now and do some things not in the comfort of your own home and not in front of a computer screen. I was able to do a speech this week to a small group of folks that we covered everything from inflation, to the markets, to the economy, to cryptocurrencies. So it was a really good time, it was nice to be able to interact with people face to face. Yes, face to face and sharing bread, if you will. So, it was a great time. So for those of you that were able to come to that, thank you very much. We will do more of those in the future as we get back up and rolling out of our bunkers.

Well, this was an interesting week. Of course, the title of this podcast being Crypto Crash, it was that, it was crypto crash. So we’re going to spend a few minutes talking about that today. I continue to get questions about it. I would probably say the majority of our audience has never invested in cryptocurrencies. That is certainly, A-OK, nothing wrong with that. But if you want to know more information, that’s what we’re trying to do, because really this is still the wild west. This is still something that I think we should all be learning about. What’s the blockchain, what’s a cryptocurrency? Which one? What are the risks, the rewards, what is this going to look like in five or 10 years? Some of those things have opinions on, most of it I do, a lot of things I don’t have any clue on. So I’m going to give you my opinion, what I think, but we don’t know. That’s what making a market’s all about. That’s why we have some of the volatility we do, but we are sitting here now, before we get to the crypto crash craze.

What’s interesting about what happened this week is you started to hear some chatter, people are wanting to know, “Hey, we’re seeing inflation pick up. We’re seeing prices go up. We’re seeing the economy improve. Shouldn’t the Fed be raising interest rates? That’s their MO, that is what they do to try to throttle things back so that inflation doesn’t get out of control. Why aren’t they doing anything and furthermore, why are they saying that they’re not going to do anything for a long time from now?” Well, they did come out this week and they talked about tapering, which is essentially saying, “We may think about, and consider thinking about, letting our foot off the gas a little bit,” but that’s very different than just raising rates. So purchasing bonds, keeping rates low, they may start to think about just slowing that down a bit, but they’re still there doing it. But is Wall Street concerned that their inflation’s out of control and they’re losing this thing and they’re not going to be able to raise rates fast enough. Is that why the markets are volatile? Or are they more worried about growth slowing? You see the difference?

So one is growth too fast and there’s inflation. The other was growth too slow and earnings are going to slow down and et cetera, et cetera. Well, that’s a big difference because that determines where interest rates go and really what the market does. If you watch the 10 year treasury, it’s been very, very flat. In fact, it closed essentially on Friday at the same exact spot that it was back in March. So we’ve gone over two months now with interest rates very flat, going somewhere between 1.5% and 1.75%. It’s as if there’s a tug of war going on between those who say, “Hey, there’s inflation. Can’t you see it? We have companies raising wages. We have commodity prices going up through the roof. So why aren’t interest rates skyrocketing higher?” On the flip side, do we have a lot the bounce, the recovery, priced into the market and therefore the bond market’s going, “You know what? That’s already happened. This economy has recovered as much as it’s going to recover in terms of the speed. Therefore, interest rates are fine where they are.”

It’s fascinating because remember, we were back here at maybe a half a percent on a 10 year treasury back in 2020 when things got really bad, they’ve tripled since then, but we’re just back to where we were pretty much before the pandemic started. 1.5%, 1.6%. So if the economy is so great, why aren’t interest rates much higher now? Again, we’re not talking about the federal reserve controlling short-term interest rates, this is about long-term rates being controlled by the market for the most part, buying and selling bonds. Why aren’t interest rates much higher?

I do think it’s because what we talked about last week after our covenant investment committee meeting, where we determined that we believe that some of this inflation that we are seeing is temporary and a lot of it is more of a bounce and it’s going to slow a little bit. That’s not to say we’re not having inflation. That’s not to say we see deflation. We believe we’re in a higher inflation situation than we were six months ago, a year ago, two years ago. However, we don’t believe that we’re going to have this runaway inflation, where prices just keep going up at this crazy level.

Now, commodity prices. We’ve been seeing lumber prices for falling earlier, last week dramatically. We saw some economic indicators come in a little weaker than expected. So the bond market’s sitting there going, “Okay, let’s just wait now. Let’s see if the recovery has happened and things are going to start stabilizing and slowing down a bit.” That’s what’s happening right now. So there is a concern that everything that we knew was happened with the recovery has happened. So the bond market’s where it’s supposed to be and the stock markets where it’s supposed to be, and that’s why you’re getting the bond market just sitting there doing nothing.

So, I think the bond market’s telling us something. The other thing that I think has happening too, is there’s a lot of, I would say expectations already built into the prices of stocks. There’s been a lot of talk about that lately, that over the long-term, earnings correlate with stock prices. I say that all the time. You’re buying profits and over the long term, if those profits are going up, the value of that stock or stocks, should reflect that, but they occasionally get out of whack and they got out of whack here in the last year. So what we have now is the stock market seems to be fully pricing in that yes, a recovery is happening and we know that, but now it’s time for the companies to continue to make those profits, to justify the prices where they are. This is not a cheap stock market by any means.

Now, there are pockets of the market that are cheaper than others, but there’s not a ton of low-hanging fruit that’s just, what a steal, what a great deal. So we need to watch that. As I’ve been saying, again, know what’s in your portfolio, make sure that if you’re buying something that’s overpriced, you may have to have an exit strategy for that and maybe it should be more of a trade than an investment, but there are still investments to be made. It’s a bifurcated market. Some people call it a stock pickers market, and we may be getting into that. But we certainly seem to be perhaps stalling out a little bit.

I mean, the Dow Jones is pretty much at the same place it was about a month ago, so it’s moved sideways a little bit. No trends have broken, anything like that. So this is not a red light, but do we pause here? Do we digest some of these gains and have really Wall Street saying, “You know what? Let’s wait to see. Let’s make the economy prove itself and these companies earnings to prove themselves over the next several weeks and months.” In other words, something has to beat our expectations for us to go and buy stocks. I think that’s what Wall Street’s signal is in the last week or so, in the last month or so, really.

If we look at this week, some of the biggest movers, of course, the volatility index after being up very, very high, close to 30, finished the week around 20. But the thing that were working this week, we had things like the metals and miners, and gold mining stocks and semiconductors did okay, but for the most part, when you look at the major indices, the Dow Jones down about a half a percent, the NASDAQ was up about 0.3%. So most of the indices were flat. So volatility is picking up, but the indices are still pretty flat.

On the downside, the things that got hit the worst. Yes, what we’re going to talk about Bitcoin, the GBTC, which is the Grayscale Bitcoin Trust was down about 24%. Now, that’s very different than the price of Bitcoin, because sometimes it trades at a discount, sometimes it trades at a premium. Home builders got hit pretty good this week, down about 4.5%. The railroads, steel stocks, retail down 2.5% to 3%, but again, nothing major yet, but we’re certainly seeing a pause, but let’s get to really the big news of the week, which was the cryptocurrency crash.

What is going on with these? So for those of you, and let me know, reply back to me if you get our Covenant U distribution, let me know, are you buying cryptocurrencies? Have you bought? Did this whet your appetite to see the cryptocurrencies come down so much? We saw really, probably the biggest flash crash perhaps we’ve seen in cryptocurrency. We’ve seen stock market flash crashes over the last several years, but we really saw, I guess it was Tuesday of this week, think was Tuesday or Wednesday, where the cryptocurrencies really sold off all at once. Some of them down 30% or 40%, literally within just a few minutes. There was a lot of, not just rumors, but fact that a lot of people that had been owning cryptocurrencies were doing it on margin, meaning borrowed money, not advised, but they were doing that in big institutions.

So when it’s sold off, they were hit with margin calls, just like the stock market, which meant they were forced to sell their positions. They were forced liquidated. When that happened, it caused, of course, more selling. So we saw big, big drops, again, 30%, 40% in a day on some of these cryptocurrencies. Part of it is people are realizing that, “Wait a second, this does cost a lot of electricity to run these computer programs and these algorithms trying to solve for these things. It uses a lot of electricity.” Elon Musk came out and said, “Yeah, it does take a lot of energy.” People thought he was being sour on the cryptocurrencies, so they sold off. Then we see China regulating and saying negative comments about regulation about cryptocurrencies and that really pushed them down, which I think that’s the number one risk for cryptocurrencies, is regulation.

Then the third thing was really the US and the IRS clamping down on wanting to know more. They want to know, number one, they’re trying to push through this $10,000 really, visibility. So if you deposit $10,000, take $10,000 out, they want to know about it. Just like if you take $10,000 to the bank in cash and you deposit it, they have to fill out what’s called a CTR. It’s a currency transaction report and essentially they want to know where did this money come from? They’re trying to prevent money laundering and so forth and illegal activity. Well, they’re really wanting to start doing that with cryptocurrencies as well. We know the buys and sells and the reporting is a little suspect right now. So I don’t know how many people are even reporting their gains and losses for capital gains purposes or not.

So there’s a lot of regulation coming down and there should be, but it’s ironic, because this is the whole reason that these things were invented, was to get away from regulation, to get away from Big Brother looking over your shoulder. But this is the battle. This is the tension that’s happening. So down they went because they had a bunch of negative news hit them. So the question is, is this mania over, is just the froth being taken out, or is this simply another correction on the way up? Remember, these cryptocurrencies have had several different body blows over the last several years and continue to come back. And there is more adoption now, but here’s the thing and I’ve said this before, you can’t take these seriously as a currency when they’re moving 30% and 40% in one day. Can you imagine your savings account doing that?

So they’re not currencies. Yes, some of them are being used as currencies and as a transaction-oriented vehicle in some countries that are really worried about their currencies not going away, so they don’t have a choice, but for the most part, number one, if you like this so much, why would you want to give it away to buy a loaf of bread? So I don’t see them as a currency and you certainly can’t have them be this volatile and be a stable currency. So they’re an asset category, they’re a diversifier. They’re something that moves differently. Well this week, they moved a lot different than the stock market because they went down quite a bit. But does it change your mind? I want to know, reach out to me @karleggerss, that’s my Twitter handle, if you’re not following me or there. Or just reply to the email, I’m very curious what you guys are doing.

If you own it, is yours a trading mindset? Is it an investing mindset? Is it something that you’re buying to hold for the next five or 10 years and saying this really long term? Or is it a trading vehicle? What’s your reasoning for buying this? But we have seen this crash, so some of this regulation is not going away. It’s going to get worse, but here’s the ironic thing. Somebody asked me in this speech I gave this week. They said, “What do you think about the US coming out with their own digital currency?” I said, “You know it’s interesting because other countries have already done this and I think that’s why they’re trying to regulate it.”

But here’s the ironic thing. The reason people like the cryptocurrencies is there’s a limited supply of them. Well, why would the US want a limited supply of its currency? That would prevent them from printing all those trillions of dollars that they print every day. Well, they don’t print trillions every day, but they print a lot every day and they have printed trillions to stimulate the economy, to send out stimulus checks. If they had a cryptocurrency, a digital coin, it wouldn’t be able to do that. Now, we might replace physical dollars and coins with a digital currency, but that’s not the same as a cryptocurrency that has a limited, finite amount. So that’s the interesting thing about this and why there’s a conflict with US. So they’re going to regulate this and they want to go after and they may tax it and they may make all this more transparent, but will they actually come out with one any time soon? Probably not. And again, all these other countries want the same thing. They want to be able to float their currency so they can use it to their benefit.

Now, if you look at your 1040 this year, which is your tax return, right under your name, there’s a line now and it says, “Did you purchase or sell any cryptocurrencies in 2020? Yes or no?” That’s it. It doesn’t say, “If yes, do this, or if no, do this.” They’re just wanting to know if you’re doing that. Now, if you put yes, then probably they’re wanting to see, “Okay, there should be a schedule D,” which is your capital gains and losses. Because if you sold them for a profit, “We want to know about them so you can pay taxes.” So again, we’re in the wild west of this. The other thing is, of course, last time I checked, there’s like 1,400 or 1,500 different cryptocurrencies.

So even if you like cryptocurrencies, which one do you purchase? They are all built very differently. I was very pleased that a lot of the people I was talking to this week were mostly retired, but yet were very interested in this and they didn’t dismiss it. They said, “We just want to learn about it. We’re not necessarily going to invest in it, but we want to learn about it.” That’s what I think we should be open-minded about. This is something new been around for a while but it’s something still very new but we should be learning about it. That’s what this show’s about, is always taking what we know about things and trying to bring them to you. So, I will be doing a webinar at some point with somebody that’s more knowledgeable in this area than me about cryptocurrencies and what’s going on.

Now, if you do look at some of these, even the GBTC ETF, which is the Grayscale Bitcoin Trust, for those technicians out there, it’s sitting on its 200 day moving average. So we’re getting close to where they will bottom from a trading perspective, perhaps, don’t know. But again, the sell-off is pretty robust right now in a lot of these. By the way, have you noticed that they all still move together, at least directionally? The magnitude’s sometimes a little different, but when they’re all down 30% the other day, almost all of them seem to be doing the same thing. It’s not like the stock market.

Now, the stock market in really bad times will have a correlation of one, and sometimes the same thing happens with this. So you can diversify in this, but again, they do move the same directions a lot of times, but I do believe that there’s continued to be more adoption as an asset category, but how much you should own, which one, it’s very complicated and of course, unique to your situation, really what you’re trying to accomplish. That’s why I’m curious, really what are you guys doing about this, if anything? If anything? If you’re not doing anything, you’d say “I could care less about it and it’s just gambling money.” So be it, let me know. I am curious.

All right, that’s going to wrap it up for today. Hey, thanks for joining me. Don’t forget, creatingricherlives.com and the telephone number (210) 526-0057. You guys have a great weekend, everybody, take care.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful. Moreover, you should not assume that any discussion or information serves as the receipt of, or as a substitute for, personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing.

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