When everyone Zigs, it's time to Zag
Alternative Assets Part 1
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60/40 is dead.
The smart money knows this but few talk about it.
That is: 60% of your portfolio in Equities and 40% in Bonds.
It’s the oldest of ‘old-school’ investing principles, that apparently balances risk and reward.
But what happens when the risk-reward profile changes?
Just kidding….It gets replaced with 60/20/20 with the introduction of Alternatives!
No, not alternative rock music, like you blared in your misguided angsty teen phase. Rather, another asset class that needs to fill the gaping void left in your portfolio by lower-yielding traditional fixed income (Bonds).
Warren Buffet has famously built his entire empire using the proceeds from his insurance business line. This segment was spitting off so much cash flow, that he used it to reinvest into other businesses that would grow over a longer period of time.
This type of ‘yielding’ AKA ‘income-generating’ asset, along with other types of store of value and other appreciating assets, is exactly what the ALTERNATIVE asset class is all about.
And if you’re a millennial like me you may not need to own bonds until you are in a Jimmy Buffett retirement home somewhere looking for consistent cash flow to keep the margaritas coming.
Historically, boomers have also loved putting gold into their portfolio as a negatively correlated alternative.
But as we all know the new gold is crypto, and the crypto du jour started as a joke and is centered around a cute dog on his way to the moon.
What a time to be alive.
Over the next two weeks we are doing a deep dive into ALTERNATIVE ASSETS. This week we cover Digital Alternatives & next week we will cover Physical Alternatives.
Let’s get started! In <5 minutes, we’ll cover:
Why “digital alternatives” came to exist 👉 change of the old guard, technological advancements
Crypto 👉 Market update and increased adoption
NFTs 👉 What the heck are these things?
How GRIT’s Playing it 👉 Sifting through the hype
1. Why “digital alternatives” came to exist 👉 Change of the old guard, technological advancements
You’d have to be living in a cave to miss the whole trend of cryptocurrencies and NFTs (non-fungible tokens), but why did they come about and why does it matter?
As more of our lives go online, I think it’s a natural progression for innovation to arrive at the asset class level.
Depending on which business school textbook you crack open, you can traditionally find around 5 different asset classes:
Real Estate/ Real Assets (Infrastructure, Farm Land, etc)
Equities are typically higher risk, higher return when compared to fixed income and bonds that provide stability (generally) and cash flow. Currency as an asset class involves making macroeconomic calls surrounding relative interest rate policy and GDP growth rates.
Commodities are cyclical in nature and tend to expand and contract with the overall economy. Real estate and real assets are historically great protection against inflation (if prices go up, so does the value of real assets).
Good news? ALL these asset classes are now available to regular investors. So there is no excuse not to be diversifying.
The idea is to have the right combination of the above assets, and this is what the smart money (the big pension funds) do in order to generate uncorrelated returns.
Why do we want uncorrelated returns? Because you want to capture returns through all parts of the economic cycle. Different asset classes shine at different times.
Conversely, difference asset classes suck at different times….
My condolences to portfolio managers running pure-play gold funds right now.
These buckets served well as traditional means to allocate capital towards efficient means of (physical) production.
But what about now? When so much of that “production” has moved online.
Enter cryptocurrencies and NFTs.
Cryptocurrencies are not like traditional currencies because they are not issued by a central bank that can control the monetary supply and interest rates. It is at the center of the Decentralized Finance (DeFi) movement (which I wrote about here), that is disintermediating banks.
When you break them down, NFTs (more on this soon) are kind of like real assets, except they are not exactly “real.”
These two assets are different and are at the wonderful intersection of an asset class revolution and the shift to a digital-first economy. Every Investment Advisor NEEDS TO PAY ATTENTION.
These are both products of the new information age that are digital native. Meaning born on the web first.
In this digital native economy, cryptocurrencies allow us to transact and (maybe?) invest, while NFTs are certificates of digital asset ownership!
2. Crypto 👉 Market update and increased adoption metrics
For those newer joiners to my newsletter, I provided a crypto overview here back in November 1, 2020. Bitcoin is now up over 300% since that letter! Congrats to the HODLers.
And as epic as Bitcoin’s rally has been, the move in the second-largest cryptocurrency, Ethereum, has topped it!
Since that newsletter, the market commentary surrounding Bitcoin and Ethereum has been characterized as “broadening strength”. This is a terrific indicator. When the “breadth” of a market rally widens, this means it is expanding to other areas, indicating overall strength and staying power.
This is due to institutions beginning to get more comfortable with the underlying technology. In early adoption stages there are trailblazers, then when iteration of ideas occurs, the kinks start to get worked out. Shots on net!
I’m not going to sit here and give you a “velocity of money” calculation in order to get to a target price of Bitcoin.
I’m also not going to argue whether it is a security or a currency because I believe it is a hybrid of the two.
What I AM going to say is that people are now paying attention to this in terms of both institutionalized adoption and as a hedge against inflation, which we know is coming with a massive amount of money printing, as we talked about here.
To me, Bitcoin and Ethereum are a store of value, a hedge against inflation, a means of transaction, and building blocks to the new digital economy.
Ideas and constructs are allowed to be different things to different people.
To you - Bitcoin and Ethereum can serve different functions - and I think that’s OK.
What you can’t really debate anymore is the widespread use and acceptance of this asset (which I have in-depth examples of here).
Since putting out that note, many institutions in Canada have put out either Bitcoin closed-end funds and now ETFs in order for Investment Advisors to gain exposure in an equity-like vehicle. These include Purpose Investments ($1.4B Crypto AUM), 3IQ ($1.2B), Ninepoint ($300M), and CI ($250M). The US has fallen behind as the Luddites at the SEC called it a “highly speculative” investment last week.
And of course I couldn’t possibly write a newsletter about Bitcoin without mentioning the act of digital terrorism Elon Musk committed this week.
Elon in the Dog(e) House…
You mean to tell me that before buying +$1.5B worth of an asset you had not done your research on its environmental implications? C’mon…!?
Last week I wrote about how getting to a 100% clean energy world is going to take some time, transition fuels and a lot of skepticism… well so does the move to energy efficiency for cryptocurrencies.
According to Harvard, Bitcoin currently consumes ~0.55% of global electricity with +40% being carbon-neutral….And as one of my favourite Bitcoiners said on CNBC Thursday:
“Larry Fink better drop the dollar then, cause the dollar is way worse for the environment than bitcoin is (mic drop).” -Anthony Pompliano
While I am a big believer in Bitcoin and Ethereum, I do think some of the altcoins will end terribly. I did a whole video on it HERE that has been watched over +25,000 times.
I see these as hyper speculative with narrow adoption, acceptance, and differentiated utility. For example….
Or it’s little cousin SHIBA with 1,900% return in one week…
But in the meantime, some pretty crazy gains are being made from these meme-coins and not just by 12-year-olds on TikTok BUT also by supposed ‘smart money’:
UNDER THE RADAR...
“The world as a whole will go cashless” Bill Gates is a smart man, so when he speaks, people should listen. iMining is the first publicly listed Proof-of-Stake (PoS) technology company that provides investors with a simple and secure way to invest in Digital Currencies.
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3. NFTs 👉 What the heck are these things?
When you try to google what is an NFT (Non-fungible token), you get some next-level mumbo jumbo:
A non-fungible token is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable
So let’s just call it what it is by taking 3 words out of this rocket surgery sentence:
Unique digital [certificate]. Much better.
If you want to go down the rabbit hole, a great resource that actually seems to be written in comprehensible language can be found here.
Just like when you buy shares in a stock, you get a unique certificate that verifies its authenticity. This also kind of starts to sound like an autographed sports jersey, and not far off from baseball or pokemon cards. I’ll get into these, and other physical assets like shoes on StockX next week.
NFTs however, exist only in the digital world - so you don’t have to worry about storing it for a price, or worry about the condition deteriorating over time.
You can’t hang it up on the wall for your friends (unless you use a SmartTV) to gawk at when they come over, and you can’t wear it on your wrist.
But when it comes to desirability for differentiation or status signaling, think about how Fortnite made $2.4B in 2018 alone selling digital costumes. So the market for digital goods exists!
Imagine a world where you log in, create an avatar that walks around. You are provided base customizability in your house and avatar (Free-to-play), then you pay or work for upgrades. In this world, you also own unique digital assets such as a car or a sword. This unique digital asset can also have utility beyond just aesthetic. This starts to sound like the metaverse!
Other use cases…
Consumer packaged goods companies like Taco Bell, Pringles and General Mills are also getting in the game. They are using it as a way to promote their brand and products to younger audiences.
Luxury goods companies like Gucci, Louis Vuitton and Breitling are also jumping on the NFT bandwagon for the very practical use of authenticating tangible goods.
NFTs add a layer of scarcity. Just like there is only one Mona Lisa, there is also only one CryptoPunk #7804. Here are the top NFT sales so far…
Let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel and see what he thinks of NFT’s?
You’re right Doctor, taking a screenshot is free…
But try taking a picture of the Mona Lisa over a sea of heads and outstretched iPhones at the Louvre through that thick glass then hang it on your wall… shitty right?
The Mona Lisa is the Mona Lisa. In a world full of fakes being real is priceless.
4. How GRIT’s Playing it 👉 Sifting through the hype
In my previous note, I discussed how I gained direct exposure to Bitcoin through Greyscale’s GBTC product, but then switch over to an ETF.
The problem with the GBTC product was that it was a closed-end fund that traded at a fluctuating discount or premium to NAV whereas Purpose Bitcoin ETF (BTCC) had a much lower tracking error by owning the underlying asset for direct exposure to Bitcoin.
By owning directly the underlying asset, I can trade in and out of Bitcoin (and now Ethereum) using ETFs right in the same account that I trade stocks. I love the simplicity.
Special GRITTY Announcement!
It is with GREAT excitement that I am announcing that in collaboration with artist D-Snow, GRIT has launched its very own NFT. What better way to know the ins and outs of an exciting asset class than actually participating in it.
D-Snow has made many custom art pieces for celebrities like Drake, Fetty Wap, Sean Paul, Bad Bunny, Justin and Hailey Bieber, Jeremy Bieber, Neymar Jr, Tyrone Rex Edwards, Auro Jr, Bruno Caboclo, Megan Thee Stallion, Zion, James Johnson and brands such as Universal Music Group.
Bidding begins NOW at CAD$250 (0.059 ETH) and will run for 30 days (until June 16th 2021). Click HERE to spend your beautiful Ethereum that is up 1,686% over the last year for a chance to own the FIRST GRIT NFT that could be worth 1,000x what you pay for it ; )Here’s the thing…GRIT could be a unicorn someday…So wouldn’t you want to hold the FIRST NFT ever created by this billion dollar baby?
Just like any other asset class, Crypto and NFTs can experience bubbles. If you look at NFTs, a basket of transactions dropped 60% in April from February highs. Crypto’s volatility is well known and published.
With every drastically altering idea comes a hype cycle, the shakeout, then the real ones thrive.
Smart investors buy starter positions, add on dips, and focus on the big picture: The future is digital.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S I am HODL’ing my Bitcoin until they “pry it from my cold, dead hands"… ; )
What else we Grittin’ On?
Show me the Money.S&P Profit margins rose to 13.1% in the 1st quarter, their highest level in history. $SPX.We like to see this!
Hedge Funds Deleveraging. Net Leverage has now dropped to the 77th %-tile over the last 12 months, which is the least aggressive positioning we have seen in a while. BUT it is still however in the 98th %-tile since 2010.
SPACtacular. Disaster! Almost 90% of pre-deal SPACs are trading below $10. I warned March 16th in this video to be careful on this “over-celebrity-heated” asset class!
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