A noticeable shift in investment media focus, seemingly consumed by some topical new sectors becoming mainstream, has played a significant part in propelling some of the constituent stocks into stratospheric valuations.
Maybe it’s lockdown boredom coupled with enforced unspent cash that has driven cryptocurrencies, hydrogen power and electric vehicles (EVs) shares to levels way above conventional valuations in a way that only some biotech sector stocks can compare.
It is difficult to ignore this surge of interest attracting investment at every level, some almost certainly driven by fomo (fear of missing out) with no regard for conventional valuation methods.
To invest we can only ignore P/Es, yields, PEGs, cashflow and all the other established investor tools and assess only the validity of the new project, the proponents and prospects for the sector.
I recently succumbed and followed the herd into these specific sectors. Today I’ll outline how I built exposure to cryptocurrencies. Later this week I’ll run through my hydrogen and EV exposure.
Cryptoassets, encompassing crypto coins and blockchain systems, are seeing increasing acceptance.
The coins, of which there are over 4,000 -bitcoin and ethereum being the best known- are traded on blockchain, a totally transparent and safe system – or so we believe. I think I understand it -in the same way that I understand the internet. I know the basics and how to use it, but I don’t need to know anymore to benefit from it every day.
The recent extraordinary rise in the bitcoin (BTC) price stems from investor confidence following strong purchases and support from some veritable organisations.
JP Morgan Chase, America’s largest bank, predicts a ‘conservative’ estimate of a $600 billion (£428bn) demand for bitcoin, following an initial $100 million purchase by Massmutual, believing that other traditional investors, including pension funds, will follow suit.
BNY Mellon plans to manage cryptocurrencies using a platform that is currently in a prototype phase and Paypal has announced the integration of crypto trading onto its platform. You may also be able to pay your Uber cab in BTC while Mastercard is also supporting cryptocurrencies.
Tesla bought $1.5bn of bitcoin and will also sell cars in the currency. There is some shareholder concern with a car manufacturing company seemingly now speculating their money on cryptocurrencies, but the profit from the bitcoin holding will significantly exceed that from selling cars.
A Tesla S at about £75,000 could be bought for BTC4,375 at end Jan (BTC/$24), but a month later, the same car is BTC2,188 (BTC/$48). If you want to buy your Tesla in bitcoin, get your timing right. Beware your Tesla shares too since the build cost for the company is in US dollars.
In the UK, fund manager Ruffer invested $600m in November and has already more than doubled that value.
These last arduous Covid months have seen us avoiding cash even for very minor purchases and using card payments. Such debits could be logged in any currency, including BTC.
You can buy bitcoins, in small amounts, on the Revolut card app, but for larger trades look at the exchanges Gemini, Kraken, Coinbase etc. But be careful, there’s no helpdesk or recourse and probably 25% of cryptos are already ‘lost’ after being untraded for five years.
How I gain exposure to cryptos
I find it easier to trade a fund or an exchange traded fund (ETF) than to set up arrangements to deal direct in bitcoin, ethereum or any other lesser known ambitious, but obscure, cryptocurrency – similarly with the blockchain companies.
I’m tempted to buy some Marathon Patent Group (MARA:NASDAQ), based (unsurprisingly) in Las Vegas. It mines cryptocurrencies with a focus on the blockchain ecosystem and digital assets from a facility in Quebec, but I currently have enough exposure and will keep it on the watch list for now.
To illustrate the crazy price swings consider this:
When I wrote a piece here on 23 Dec 2020, I suggested KR1 (KR1:AQSE), an investment company holding blockchain ecosystem projects and digital based assets, when the price was 17p. Last week, when I sold half my holding it was 214p, a rise of 12x in two months, but it has settled back to 165p, still almost 10x.
If I was buying now I would buy a quarter unit and drip feed in over four months.
Other UK quoted holdings include Argo Blockchain (ARB), a cloud-based crypto mining company, directly depositing all coins mined into the investor’s digital wallets. Using my very short time span of the last two months from my Citywire piece, the price is up from 17.7p to 245p, which is crazy – be very careful and beware, falling knives can be hard to catch.
Also look at UK quoted Online Blockchain (OBC), an incubator and investor in related internet and information businesses. The two month price move is a ‘more modest’ 28p to 76.5p.
In the US, I am tempted to buy a half unit in Purpose Bitcoin ETF (BTCC), new to the market last month with powerful institutional support, including JPMorgan. In the next weeks we will see the crypto trading platform Coinbase (CBASE) float on Nasdaq. One of several crypto platforms, it is the largest, trading for nine years and the IPO is eagerly awaited.
Currently this seems a mad sector but worth attention as cryptos become mainstream. Supply is limited in that, unlike the fiat currencies which print more at the first sign of trouble, 21 billion bitcoins is the finite number and will never increase.
I’m a strong believer that the world needs a digital currency traded through blockchain with an international valuation – finite in volume and hence a store of value, not subject to the massive debts and money printing habits of the USD, sterling, euro and yen fiat currencies.
Bitcoin, with its shadowy beginnings may not be the one, but it is certainly gaining respectability – a fact which has driven its price fiercely upwards with wild volatility to the point where last week the value of bitcoin in circulation exceeded $1tn.
A better new cryptocurrency will be developed, properly regulated and monitored, operated on an improved and faster blockchain system.
David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies including Hawksmoor Investment Management. He may have an interest in any of the investments that he writes about.