Digital assets are risky, but are they riskier than some of the higher yielding parts of the corporate and sovereign bond markets? Would you rather speculate in bitcoin or 100-year bonds issued by Argentina, a country that has defaulted on its sovereign debt on eight separate occasions, most recently just three years ago. Those bonds were 3.5 times oversubscribed. Or what about bonds issues by Lebanon, a country that has not had a budget for 12 years, that trade with a yield slightly over 6%. Other bond categories like emerging market sovereign bonds and U.S. corporates have lower levels of return (spread) per unit of risk (duration) than at any point in history.
What about stocks? Is speculating in a digital asset any different than speculating in stocks like Tesla, Facebook, Amazon, Netflix, Nvidia and a host of other high-flyers with prices disconnected from current earnings. Like bitcoin, these stocks may or may not prove to be good long-term investments, but there is no guarantee of that today. Their value is based on faith in an unknown future. As a Forbes contributor wrote earlier this year:
"Tesla’s astounding market capitalization does require some explanation. At the most basic level, the stock price of a firm is no more than the net present value of all future earnings. [N]o one should believe that a company is going to suddenly make $1 billion in net profits if it barely broke even the year before."
As of November 2016, Tesla’s market share in cars and light trucks was a tiny 0.3%. Over the same year, some 76,000 vehicles had rolled out from the factory. In contrast, Ford’s F-Series alone sold 780,000 units in 2015. How many cars does the financial market expect Tesla to sell in order to justify the stratospheric valuation?
Beside irrational exuberance, what else could explain such market behavior?
While we cannot confidently value bitcoin (no one can), we must humbly acknowledge that it has utility today. It may fail spectacularly tomorrow or it may rise tenfold over the next few years. When you look at it that way, bitcoin can be viewed as a call option on a really fascinating, but unknown future.
Source: C-SPAN (Yellen testimony to House Financial Services Committee)
Sincerely,
The SpringTide Investment Team
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Disclosures
This report is for informational purposes only and is not intended to provide investment advice. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, market sectors, other investments or to adopt any investment strategy or strategies. This material is not intended to be relied upon as a forecast or research. There is no guarantee that any forecasts made will come to pass. As a practical matter, no entity is able to accurately and consistently predict future market activities. The opinions expressed are those of SpringTide Partners LLC (SpringTide) as of the date of publication and are subject to change at any time due to changes in market or economic conditions. While efforts are made to ensure information contained herein is accurate, SpringTide cannot guarantee the accuracy of all such information presented. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by SpringTide to be reliable and are not necessarily all inclusive. Reliance upon information in this material is at the sole discretion of the reader. Material contained in this publication should not be construed as legal, accounting, or tax advice.