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The Rational Investor On How To Value Assets Like Crypto Currency
ValueWalk’s interview with Brian Beamish aka The Rational Investor. In this interview, Brian discusses his and his firm’s background, helping students build out their small business of trading, mass adoption of blockchain and the hype around the ‘get rich quick’ aspect of crypto currencies, the fundamental value of an asset like a crypto currency, what makes bitcoin more unique than gold and how cash has no value, Ethereum issuing multiple number of tokens and Bitcoin clones, Libra is indeed a PR stunt, the Fed’s realtime payment system, SEC’s crypto regulation, and if regulations impact money managers.
Can you tell us about your background?
I have worked and traded (both privately, for clients and for proprietary trading firms) within the financial services industry for more than 30 years. I got my first job in the market in 1988. I have done almost every job possible within the industry including back office/compliance, retail client administration. retail stock, bond, mutual fund, commodities and derivatives broker & proprietary crude oil trader. I became interested in Crypto-currencies in 2014 and have dedicated my time since then to trading/investing in crypto-currencies and teaching others to do so as well.
When did you start your firm and what does it do?
My business partner (Julian Speranza) and I started our venture (therationalinvestor.com) in July of 2014 as both an educational and a demonstration platform for those interested in learning how to run their small trading businesses. We quickly discovered we needed professional help with the website and brought on a third partner (Sjoerd Maessen) in 2016 as our CTO. The three of us have been running the business in partnership since. Through both the teaching and demonstration of best practices (including a high degree of what we call PMA – positive mental attitude) we believe TRI provides a very unique approach to what is otherwise the very cold business of ‘trading’. Our blossoming community and overwhelmingly positive customer feedback is a testament to that vision.
What services do you offer?
Our primary product is our educational program with a secondary emphasis on demonstration. We run daily market review / educational sessions which run about an hour in length (The Daily Brief) and we run a formal education program (Three levels covering 36 topics) where we instruct on specific weekly topics in a very orderly systematic way to help students build out their small business of trading.
What trends are you seeing with blockchain is it just a hype word or does it solve any pain points businesses have?
- What trends are you seeing with blockchain – Currently the concept is in the process of ‘mass adoption’. The technology has been proven and now it is a question of integration. How do you connect the old world with this new one. That integration process is already underway and in my opinion is unstoppable at this point in the story.
- Is it a hype word or does it solve any pain points businesses have – The ‘get rich quick’ aspect of crypto currencies is very much a ‘hype’ idea. The technology behind blockchain, on the other hand, is extremely valuable. Not only does it create massive efficiencies within the record keeping space, but it also may represent a key profit growth driver for the upcoming bull market I expect to develop within the financial services sector over the coming decades. Ironically, the very people crypto hates the most will probably benefit the most through this coming growth cycle from this technology.
How do you value a new currency or asset like bitcoin – how do you decide if you want to buy, sell or hold it?
As ‘rational’ analysts (the core of what we teach in our education program) we must have both Fundamental reasons & Technical reasons for justifying buying any asset. So to answer your question,
- Determining the fundamental ‘value’ of an asset like a crypto currency is similar to determining the value of any commodity – cost of production. Or in other words, what is the minimum price the commodity must be to maintain itself. In the case of gold, what is the cost to mine the asset out of the ground. In the case of a crypto currency like Bitcoin, what is the cost to keep the network running (what crypto people call ‘mining’ – no accident in my opinion). Indeed, Satoshi Nakamoto himself stated in his while paper, the price of any asset like a crypto currency should gravitate towards that cost of production or ‘value’. The problem for the public is price doesn’t usually stay at that level for very long and when it is there, they are not interested in buying discounted out of favor assets. Only when price shoots up well past that cost of production (like right now) are they interested in buying.
- When an asset is deemed to be at Fundamental ‘value’ we then apply Technical analysis to help us ‘time’ our purchases. We try to look for good location (bottom of a trading range) then we look for internal signs of strength (ideally what we call ‘bullish divergence’ in our indicators) and then we look for price structure (ideally W’s in price) to help us frame where to enter, where to risk to and only then where to appropriately look to exit/take profits given the risks taken.
What about Bitcoin alternatives like gold and cash?
I don’t think I understand the question. I will break these assets down and compare them
- Bitcoin and gold are similar in that they both have a finite supply and they are subject to open market price swings that often can make them extremely overvalued but that is where the similarity ends. While one can use gold in the manufacturing process (electronics for example) one can not use Bitcoins to manufacture anything. While gold can be worn as jewelry and is a public display of wealth (India wedding season for example) one can not do the same with Bitcoins. One could argue gold has metallurgical properties and some even eat it (believing it prolongs life etc.), Bitcoin does nothing of the sort. Since both are relatively scarce, there is a perception of ‘value’ through uniqueness – but keep in mind, there have been many times throughout history when the ‘value’ of gold comes into question and it has been ‘cheap’. Just because it is considered valuable now, doesn’t mean it will be down the road.
- So what does bitcoin do that makes it unique? It is a vehicle that lets the ‘unbanked’ bank. It allows the movement of wealth from one individual to another without the need of an intermediary. It is fully transparent and trustless since it has no central controller. As long as the miners continue to validate the network anyone/anywhere can use the network to move wealth to anyone/anywhere in the world. In a world of corrupt politicians and un-trustworthy (and downright costly) banks this service is priceless. The advent of ‘internet money’ as Milton Freedman predicted was going to happen, it was the next evolutionary process of the internet. The fact that we call it Bitcoin is not really relevant, the concept of permissionless currency on the other hand is history altering.
- ‘Cash’ is a funny creature in itself. Technically, under our Fiat currency model world we live in, ‘cash’ has little to no value at all and is nothing more than a vehicle to move wealth through. Fiat currencies even state themselves, their only value is the full faith of the (fill in the blank) backing government. Under the Fiat model, investors use ‘cash’ to buy a country’s assets. Those assets could be stocks, hard assets (like factories or land or equipment) or personal/corporate/government’s debt obligations. Should a country default on those debt obligations (like Russia in 1998 or many South American countries over the past decades) their Fiat currency can become worthless very quickly.
Why about ether and other big cryptos?
- Ethereum is another creature unto itself. I have often wondered what the fundamental ‘value’ one Etherium is and both myself and our community at TRI (we have hundreds of alumni that are all very skilled in the computer industry) have a hard time coming up with that number. Many of the Fundamental stock screens we teach at TRI (based on my many years as a retail stock broker/trader) are based on the number of shares outstanding for a company (the lower the better). And indeed, the fact that bitcoin will only have 21 million coins circulating is a huge selling feature. Unfortunately, Ethereum has multiples of that number of coins outstanding so as a result the ‘value’ of each coin has to by definition be a fraction of something like Bitcoin. Additionally (and here is where it gets tricky) since Ethereum has issued countless ‘tokens’ on its blockchain, technically the supply of Ethereum (in one form of token or another) is staggering. Lastly, Ethereum is also going to go through a dramatic personality change at some point in the not too distant future. It’s change from POW to POS network validation will bring in ‘value’ questions in on itself.
- There are many different types of crypto-currencies that do many different things. Some are like Bitcoin (maybe even clones like Litecoin) others do completely different jobs (internet of things like Stellar/Lumans) so asking about the entire space is like asking which is your favorite vegetable. Your doctor might tell you ‘you need to eat more green leafy veggies’. You go and eat a tomato. Technically both are vegetables but they are not the same thing. To succeed in this space one must figure out ‘why’ you would use the crypto and then go from there. Remittance as always been the cornerstone of a coin like Ripple, whereas (as mentioned previously) tokenization of an asset (smart contracts) has been the hallmark of names like Ethereum and finally ‘store of value’ has been the hallmark of names like Bitcoin. As for the future, there will be and are new names coming into the space continuously. The best part about crypto is really it’s people. These are young, smart, very driven innovators. I guarantee you, tomorrow’s Ethereum is already being developed as we speak, this story is just getting started, not coming to an end imho.
Big talk about libra many saying its just a PR stunt what do you think?
Libra in my humble opinion is not a crypto currency in its purest form. It is indeed a PR stunt to try and take advantage of the hype around crypto and does not even come close to the ‘permissionless’ concept first put forth by Satoshi. The concept should be squashed and could be a serious threat to national security having that much power concentrated in very few people’s hands.
Is it really a crypto or more like a money market account? How would Facebook make money off of it?
See above but yeah more like a ‘money market account’ and not a crypto. It would be more like the US$ index (which is a basket of foreign currencies) so maybe we should be calling it the Libra Index (that’s an interesting pandora’s box).
What is the Fed realtime payment system it plans to develop is this competition to any of the cryptos?
It is my belief that our entire financial services industry will be fully integrated in the blockchain within the next 20 years. I believe it will drive massive efficiencies within the industry which will drive productivity which will in turn drive profitability – this is inevitable. Indeed, your children will grow up in a world that is on the blockchain – it is coming. Within a century, I would not be surprised if every person born is on a ‘blockchain’ with an indelible record of their entire lives permanently on record somewhere. The US Federal Reserve Board (along with many other countries around the world) moving in that direction is only natural. The Fed (as nothing more than a front for the US banking industry) is in the process of ‘taking over’ the US side of the equation. My hunch is, that process of transformation will be slow and take many forms where the ‘real time’ payment system proposed is just one step in that direction. Bitcoin will always have its international appeal (for those in Zimbabwe for example that have absolutely no faith in their local currency). Could Bitcoin run into competition within the US from these kinds of ideas, sure but remember, many who use Bitcoin are not under US jurisdiction.
Do you think the SEC is taking the right approach to crypto regulation?
I think they are doing what is only prudent. There is massive amounts of fraud in this space and countless stories of ‘scams’ (please research Cabbage coin [fantastic interview my friend Alex Sterk did with them] or Bitconnect for reference). This is an unregulated space and cleaning it up is a long slow process. ‘Hacking’ is still a very real risk and this is still a very speculative (sometimes nasty) space. Additionally, the SEC is a massive bureaucratic body. They move slowly and that process is painfully slow but in my opinion they are heading in a good direction. As with any regulatory body, they are going after the ‘low hanging fruit’ at the moment but their efforts to at least make crypto-currency participants transparent (KYC issues) is a good thing.
What could they do better?
On balance, I don’t think they could do much better given what I said to the question above. Ironically, if US regulators come down too hard, this technology (and all its growth implications) will simply gravitate away from the US market to friendlier shores. I have noticed lawmakers have purposefully avoided direct references to Bitcoin/Blockchain and have more concentrated on ICO’s, KYC and exchanges as ‘the problem’.
How do crypto regulations impact those managing money like yourself?
It doesn’t make any difference. Ironically, when Bitcoin’s price was above $1000 I did not buy any more but was a net seller at $10,000 and above. I was a net seller through 2018 and have not ‘invested’ any new money into crypto-currencies themselves since. I have established a very robust portfolio of ‘free’ positions (as well as paying ourselves handsomely for our efforts) and am simply sitting on my ‘free’ coins waiting for the next bull run. If you know what you are doing (as a trader), regulators are not really an issue. Does that mean the ‘clean up’ process is easy and painless – no. Bear markets are a pain, but they are natural and must happen to set up the next bull market (ebb and flow).
What about FINRA and the CFTC?
Not sure I understand the question – as I always tell my students, a little bit of regulation isn’t such a bad thing. As stated above a good trader actually likes to have set rules to work within – a level playing field is always better than a tilted one (please refer to Cabbage coin story for reference).
If you could pass one crypto related piece of legislation what would it be?
That’s a dangerous question. What might seem like a good idea now may actually set the stage for a nightmare down the road. Full disclosure is always a good thing and some sort of international standards of practices might be helpful too.
Ironically, in trading we have an old expression, careful what you wish for, you might just get it good and hard!
I hope my answers to your questions were of help and I look forward to our future conversations.
Aka The Rational Investor
This article was originally published in ValueWalk.