Welcome to our regular Friday mailbag edition of The Daily Cut.
This is where you get a chance to put your most pressing questions to Teeka Tiwari, Jeff Brown, Dave Forest, and the newest member of our team – Nomi Prins.
So make sure to send your questions to feedback@legacyresearch.com.
If you don’t already know her, Nomi is a former Wall Street insider who’s spent the last two decades blowing the whistle on the unethical practices of the elites there.
She’s also dedicated to helping regular folks navigate the distortions central banks’ massive money creation causes.
Below, she shares why she believes bitcoin (BTC) deserves to be a long-term holding in your portfolio alongside gold.
But first, you’ll hear from Teeka and Jeff about the recent sell-off in crypto.
Since its peak last fall, bitcoin (BTC) is down 45%.
The world’s second-most valuable crypto asset, ether (ETH), is down 50%.
And the crypto market cap – the sum value of all tradeable cryptos – is 44% below its peak.
Now, some readers are worried…
Reader question: If so much investment capital is flowing into crypto, why is the bottom seemingly falling out of it?
– Al W.
Teeka’s response: The crypto market is ugly right now. And I’m not sure it’s done being ugly.
The big question is whether there will be another bear market like the so-called Crypto Winter bear market. From the end of 2017 through December 2018, bitcoin plummeted more than 80%. And ether plunged 90%.
But I don’t think we’ll see those kinds of price falls this time around.
During the Crypto Winter bear market, many of the use cases for these blockchain projects were completely theoretical.
Only at the end of 2019 and early 2020 did a lot of these theoretical use cases start becoming real. Real commerce began to take place across these digital platforms.
That’s also when investors started allocating tens of billions of dollars to them. And there are many more participants in the market now than there were back then.
What we’re experiencing right now is certainly a bear market. But it’s a cyclical one, not a secular one.
Secular means long-term. Secular bull markets – like the one in U.S. stocks from 1982 to 2000 – can span decades.
But within those secular bull markets you can have cyclical – or shorter-term – bear markets.
The Black Monday crash on October 19, 1987, springs to mind. It happened in the context of a nearly two-decade secular bull market. But it still took the Dow down 22.6% in a single day. That was the biggest one-day drop for the Dow in history.
In that same period, we had a mini crash in 1989… and another crash in 1991, during the First Gulf War.
Many investors confused these cyclical bear markets with the end of the secular bull market. And that was a mistake.
To make money from 1982 to 2000 in the stock market, you had to know the answer to just one question: Were we in a long-term bull market or bear market?
If the answer was bull market, all you had to do to crush every money manager out there was hold for the long run.
Even better, every time the market retreated, you could have bought blue-chip stocks at steep discounts. That was a winning strategy for 18 years.
The same goes for crypto today. We’re in a long-term, secular bull market in crypto. This will last a very long time.
I don’t think we’ll return to the days of 80% or 90% drops in blue-chip cryptos such as bitcoin and ether. I think the market has gotten wide enough… and the liquidity has gotten deep enough… And thanks to more institutional investors entering crypto, the market has changed from the early days when mostly individual investors owned crypto.
The folks involved now have much deeper pockets. They’re longer-term thinkers. And they’re not afraid of volatility.
So I’m not worried this is the end of the crypto bull market. You shouldn’t either. As I tell my readers all the time, the kind of volatility we’re seeing right now in crypto is the price you pay for a shot at truly life-changing wealth.
Jeff’s response: Hi, Al. Thanks for sending in your question.
You’re right. It seems counterintuitive. If so much investment money is flowing into crypto, shouldn’t prices be going up?
As usual, context is key.
Bitcoin shot up from about $10,000 in October 2020 to about $68,000 last November.
That’s a 580% gain in just over a year. Most stocks don’t do that in two decades.
I’m not surprised to see the crypto bull run take a breather. Even where bitcoin is trading today, it’s still up about 252% since October 2020.
Much of the recent volatility in crypto ties to concerns about the Fed – America’s central bank – hiking interest rates at a faster pace than investors previously expected.
When it raises rates, it drives up borrowing costs. This majorly affects markets…
For example, early stage tech stocks often depend on borrowing in the bond market to fund their growth. If the interest payments they have to make on those bonds rise, it cuts into their margins.
As a result, shares in these companies – and any companies investors deem high-risk – tend to sell off.
That’s why interest rates matter to crypto, too. Many institutional investors view crypto as a riskier asset in the same category as tech stocks.
But this is a near-term effect. Because I believe the Fed’s guidance about raising interest rates three times or more this year is misleading.
It’ll probably raise rates by a quarter of a percentage point in the first half of the year, just to send a message to markets that it’s doing something to fight inflation. But I doubt we’ll see much more than that.
That’ll leave short-term interest rates below 1%… which is still free money when inflation is running at an annual pace of 7%.
In short, investors are overreacting to something that won’t be a significant threat. Once they realize this, we’ll see a rebound in riskier assets such as tech stocks and crypto.
And don’t forget, these dramatic price swings – aka volatility – are common in the crypto market.
Since bitcoin hit $20,000 for the first time in late 2020, the crypto market cap has seen nine pullbacks of 20% or more.
Equally important is how fast the market rebounds, even after the biggest drawdowns.
In 2021, the crypto market cap sunk more than 50%. It then rebounded more than 126%. And it took only about a month and a half to hit a new high.
So I’m not worried about the recent drop in crypto prices. I expect the volatility to swing back in our favor in the coming months.
To wrap up today, we’ll turn to Nomi… and a question about the merits of bitcoin versus gold and silver.
She worked for some of Wall Street’s most storied investment banks including Bear Stearns, Lehman Brothers, and Goldman Sachs (GS).
But in 2001, she quit a seven-figure job on Wall Street to spread the word on the shady practices going on there.
And since then, she’s dedicated her life to empowering regular investors to navigate the distortions these elite institutions create in the economy and in financial markets.
Like Jeff and Teeka, Nomi is bullish on bitcoin’s future as a store of wealth outside the traditional finance system. But she also recommends her readers own gold for the same reason.
As she recently put it over at her new e-letter, Inside Wall Street With Nomi Prins…
Gold and bitcoin shouldn’t compete for a position in your portfolio. They’re fundamentally perfect companions…
For all their differences, they share one critical theme: They’re each a sound alternative to the fiat currency system.
But not all her readers agree…
Reader question: Gold and silver are the only full-fledged monies in the world. They are also the only monies the U.S. Constitution recognizes and authorizes.
The demand for bitcoin isn’t widespread enough for the average man in the street to be ready, or even able, to accept it as a currency.
It is far too volatile to be a long-term store of value. Indeed, it’s highly unlikely it will even be around in 10 years – at least in its present form.
Bitcoin is just a Ponzi scheme. It looks a lot more attractive than fiat, as long as its price is going up. But you could say that of any other financial entity. They’re all in a massive, fiat-driven bubble.
When these Ponzi schemes collapse, as they all do sooner or later, and the world financial system collapses with them, many widely desired commodities will function as currencies (e.g., food, booze, tobacco, bullets, medicine).
But only gold and silver will hold and increase their value.
– John R.
Nomi’s response: Hi, John. Thank you for your message. You’ve pinpointed some important issues.
I agree that gold and silver are the only forms of money whose value comes from their use, wealth storage, and historic acceptance as having value.
And I support reviving some form of a gold standard. This would curb this massive money-creation we’ve had since the 2008 financial crisis.
But neither gold, nor silver, nor bitcoin is a fiat currency. They all also have scarcity value. Gold and silver are in finite supply for geological reasons. Bitcoin’s code limits its supply to 21 million coins.
Bitcoin arose because people wanted an alternative to the fiat monetary system. Some have become wildly rich in the process. But mostly, the appeal of bitcoin as a lasting fiat alternative will grow as more people can use it and feel secure.
So as long as the battle against fiat currencies continues, bitcoin has staying power – especially if its volatility stabilizes.
That’s why I don’t view bitcoin as a Ponzi scheme. Its journey towards mainstream adoption shows no signs of slowing down. And I believe its value will rise accordingly. So it’s something I’ll continue to recommend my readers hold in addition to gold.
That’s all for this week’s mailbag.
Remember, if you have a question for anyone on the Legacy team, be sure to send it to feedback@legacyresearch.com.
Have a great weekend.
Regards,
Chris Lowe
January 28, 2022