My thoughts on Bitcoin and cryptocurrencies

Bitcoin (BTC) has been hacked several times, mostly for “proof of concept” and not for nefarious intent. The algorithms for creating new BTC are now so difficult to compute that most BTC farmers are out of that business. The processing power to break the global BTC ciphering ledger is well within the reach of organized groups of hackers.

All currencies are representations of “distilled work”. Counterfeiting (e.g., Quantitative Easing) produces currency with no beneficial distilled work product, which is why it’s illegal. BTC is currency produced by computer algorithms, which has no beneficial distilled work product. BTC has zero intrinsic value, only what a greater fool will pay for it in goods, services, or cash (i.e., government backed currency).

Exchanges, like BTC and Nasdaq and NYSE, set prices not by the intrinsic value of the cryptocurrency or the shares of stock, but rather by setting the “bid” and “ask” prices to produce a net profit for the exchange while balancing the demand versus supply. It is just like setting the odds line for sports betting. High demand increases the bid price to attract more supply. High supply decreases the ask price to attract more demand. The spread between bid and ask is the profit for the exchange, which earns profit regardless of which way the price moves.

When you buy stock, it’s because you think it will increase. However, you are buying it from someone selling that stock, because he thinks it will decrease. Very rarely will you have an opportunity to buy from or sell to the company that issued the stock. Your purchase of stock will not directly benefit that company.

This is why a “penny stock” company called CYNK Technology stock price skyrocketed to a market valuation over $1.5B for a company with zero revenues, zero capital, zero assets and a business model that cannot produce revenues due to existing more cost effective competition. It was all about computer algorithmic balancing of the demand versus the supply, and had nothing to do with the intrinsic value of the stock. The SEC had to step in and halt the stock. A free market would not allow a government entity to halt or manipulate trading in anything, but “exchanges” are designed to control the markets for the benefit of the government.

BTC and other crypto currency exchanges suffer from the same inherent design flaw. It’s all about creating a profit spread between the “bid” and “ask” prices while balancing the demand versus the supply. It has nothing to do with intrinsic value of the crypto currency, which is always zero.

This is why I recommend investing in real assets like, gold, silver, and income producing real estate. These are called “hard assets” precisely because of their identifiable, well recognized intrinsic values.

Income property produces sustainable cash flow, with proper management. That cash flow can be assigned a yield relative to the cost of investment, called the “Capitalization Rate” or the “Return on Equity” (also called the “Cash on Cash Return”) for leveraged investments. Income property is responsive to inflationary pressure on expenses, and a conservative debt coverage ratio can respond to deflationary pressure on rents without defaulting on debt. Income property can be leveraged through multiple financing tranches, which distributes risk versus reward relative to the tranche yields on investment.

If you are interested in learning more about the benefits of investing in income producing real estate without the management headaches, contact me on my support page.