So here we are, the Feds are getting ready to auction $17.4 Million worth of bitcoins, that they got from Silk Road, and cautious people are getting a bit nervous about the effect this may have on volatility. Bitcoin is a new (relatively) technology and volatility…
Now, let me begin by putting our present economic environment into context, things are bad. The world’s economy has fallen to the lowest level since the worldwide recession ended, at least officially, in 2009. German bonds, as well as American bonds, are de-facto charging investors interest for the privilege of investing rather than paying their investors interest. The future of the euro zone’s is no longer certain and the red-hot economy of China, the second-biggest in the world, has cooled to what looks like a baby pink.
There is a temptation at times like this for investors to retrench, to grab the money they have left and run, straight out of the market.
Well, there are alternatives, you can stuff the mattress with cash, you can buy paintings in the hope that you’ve supported the next Van Gough, you can just dig a hole and bury cash… none a great idea. But there are alternative investments and it’s important to effectively assess them all before jumping in. There are five factors that the savvy investor must consider:
Can we turn our investment quickly into cash? When do you need your money? An asset with liquidity is worth more, let me give you an example, Investor A buys an apartment for $1 Million. One month later he needs cash, he can sell the apartment for a profit but that will take six months, or he can sell to another investor for cash… but he wants it for $800,000…take it or leave it. That is the advantage of liquidity. If you don’t need your investment in the short term, then this isn’t an issue.
The investment has to rise when traditional markets fall and fall when traditional markets rise. If it doesn’t do this, and behaves as a traditional investment… then it isn’t much of an alternative investment… is it?
This may seem obvious, but the obvious rarely is. Will people actually buy this? Markets are often temporarily fooled. Remember the dot.com bubble? Whenever you find that you’re unsure revise the tale of the dutch tulip bubble.
Does the value change with region or does it alter with societal fads? More collectors of Scottish war medals live in Scotland than in China, hence, where do we want to sell our medal? Remember, an oil painting that is popular today may well decline in value as the painter’s popularity wanes.
If you think that Bitcoin may tank by 10% in the coming year, you may move to cash and/or gilts. If you think the stock market will drop by 50%, you may want to move into gold. If everything is going to collapse… seeds and water will probably turn out to be as good as it gets. The key words here are perceived and risk.
Now, if you want to diversify, gold is good. The simplest explanation of the popularity of gold is that it fulfills two functions, a store of value, and also, gold functions as an alternative to currency. Then again, there’s always collectables. Develop a bit of expertise and trade upon it. Remember this though, the rarer and more valuable the collectable is, the lesser the liquidity.
Bitcoin has been a rising asset since 2010, and unless you invested in late 2013, you are ahead.
I am pro crypto, let us just wait and see.
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Last modified: January 10, 2020 2:07 PM UTC