Long Cryptocurrencies

Hi, humans and some robots that will flood this website’s traffic. Are you the one that brought up Bitcoin in Thanksgiving dinner? I will keep this article brief. As I started writing, I got too excited and wrote even more than I initially intended. Writing is powerful.

About 5% of my capital is in Bitcoin ($BTCUSD), Ethereum ($ETHUSD), and Litecoin ($LTCUSD). I suggest you go long these with the amount of money you can afford to lose without pain.

Mind me with “BITCOIN IS IN A HUGE BUBBLE.” Don’t waste time valuing bitcoin as it were just another type of security. There is no clear way to value these. So why not put the money you can afford to lose? It will just continue rising for who knows how long. Or you will just lose the money and continue to live as usual. Buy and Hold Cryptocurrencies.

Cryptocurrencies are a new asset class that serves decentralized applications (which allows you to do something you do today, but without the middle-man). Like stocks serve companies. Municipal bonds serve states and cities. Etc.

How can I buy Bitcoin? The easiest way to use middle-man brokerages. The most popular one in the U.S. is Coinbase.

As bitcoin price surged, so too have the number of Coinbase accounts. In the past 12 months, the number of Coinbase users increased 167% to 13.1 million. Coinbase now has more accounts than Charles Schwab which has 10.2 million accounts.

Bitcoin Price vs. Coinbase Accounts: 2013-2017
Source: Bespoke

Just today, all three cryptocurrencies, brave people and I hold hit All-Time-Highs (ATH). ATH headlines literally every day when it comes to Bitcoin.

Humans of planet Earth have been calling Bitcoin a bubble since $2000. Yet, it keeps going up and up and up…. Crashes few times about 20-30% time to time. Within days, it will hit ATH again. Like I keep saying to a countless number of people who ask me about Bitcoin. I have no idea where Bitcoin price will be at tomorrow, next week, next month, next year, next decade. But, I’m absolutely willing to put the amount of money I can afford to lose without sadness.

From what I noticed there are two types of people calling Bitcoin a bubble;

  • Inexperienced people without knowledge of basic economics and finance. Some keep comparing “Bitcoin bubble” to Tulip Bulbs, when in fact they don’t know anything about tulips. They still might turn out to be right.
  • Those people who missed out the increase in Bitcoin’s value. They still have an opportunity to buy.

At Delivering Alpha last September (which I did not attend this time around), JPMorgan CEO Jamie Dimon called bitcoin a “fraud” that will eventually blow up. Eventually.

He also joked about his daughter buying some bitcoin, and now she thinks she’s a genius. He also called any JPMorgan trader who trades bitcoin stupid and should be fired in a second.

I love and respect Jamie Dimon. But, I have to disagree with him on bitcoin. I’m a big fan of him (in addition to all other CEOs of major financial institutions haha). All jokes aside, I do respect him, his passion, his curiosity, and his opinions.

On the same day of Jamie’s comments, I along with other Baruch College students went to Goldman Sachs headquarters for a fireside chat with GS CEO Lloyd Blankfein. One of the questions I wanted to ask him was his reaction to Dimon’s comments AKA his opinion on Bitcoin. Didn’t get that chance. But, great event! Not long afterward that day, news came out stating Goldman Sachs is exploring a new trading operation dedicated to cryptocurrencies.

The technology behind bitcoin, Blockchain, is the real winner here. How can I and you benefit from it? Find companies that are heavily investing in the blockchain.

Decentralized services have a lot of challenges compared to their centralized counterparts. For one, they are slower.

  • Visa processed over 42 billion transactions in the second quarter or around 5,500 transactions per second. Whereas Bitcoin’s Blockchain is limited to less than 10 transactions per second. To put this in perspective, Bitcoin can only handle about 5% of the transactions that Paypal processes a day.
    • If you have been following Bitcoin development, you would know there was a “fork” which gave birth to a new currency, Bitcoin Cash (Bitcoin holders got free Bitcoin Cash!!!). Bitcoin cash is capable of handling about 60 transactions per second, a significant improvement I’m not going into depth about those, but to learn more about Bitcoin forks and Bitcoin Cash, check this article, Bitcoin Cash is Bitcoin. A lot of innovation in this space.
    • Remember, Bitcoin forks gives you free cash…if you own Bitcoin. If you use third-party to buy/sell bitcoin, you might run into some issues which can be worked out with the help of other Bitcoin holders and threats.

Other challenges include the cost of transactions (which Bitcoin Cash also addresses), volatile and uncertain governance, etc.

CME Group recently announced to launch Bitcoin futures at the end of the year. It could lead to more institutional investors entering the market….and more power to bears. But don’t let that stop you from buying bitcoin. Even Dimon at the same Delivering Alpha said,

“I am not saying go short. Bitcoin could touch $100,000 before it goes down. So this is not (what you) advise somebody to do.”

It is true Bitcoin could touch $100,000 before it collapses 99.99%. Or it could touch $1,000,000 before dying.

So, take 5-10% of your money which you can afford to lose and buy bitcoin and some other digital currencies with big market capitalizations.

Warning: Be careful. Some people had their cryptocurrencies stolen. Coinbase posted useful post on how to protect your digital currencies.

People who got hacked seems to be the people that announced to the public (via Twitter, blogs, etc) they are invested in the new asset class. While back, I tweeted I’m invested. And now this blog. I’m scared!!!

Twitter account: @Khojinur30

Take some precautions.

I wrote this article right after my parents asked about Bitcoin and expressed an interest to buy it. I was shocked to hear my parents say it. So now I will interview them, get access to their finances, and decide whatever they should invest in it or not. If so, by how much? #HelpPeopleAchieveTheirFinancialGoals

Disclaimer: The views expressed and any forward-looking statements are as of the date indicated and are those of the author. Discussions of individual securities, or the markets generally, are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Khojinur Usmonov disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

The Importance of Downside Protection

Big-Risk = Big-Return is true for individual securities. But not for a portfolio. A common misconception for investors (and traders).

Risk-Reward has a positive correlation, but it’s not perfect.

Risky securities are diversifiable by lower correlated/negative correlated securities. By buying low correlated securities to hedge your risky security, are you lowering your upside? No. You’re lowering your downside.

For investors, capital preservation is more important than the growth of capital. The bigger the investment loss, the greater the gain required to break even. A 20% investment loss requires a 25% gain to get back to the initial investment value. Whereas a 40% loss requires 67% and 70% loss requires 233%. The best offense is a good defense.

The Importance of Downside Protection

If you invest $10,000 in S&P 500 ETF and a recession causes the market to drop 30%, the $7,000 value would need to gain 43% to get back to $10,000.

Let’s look at the following 3 portfolios, each with a different strategy:
  • Portfolio 1 is invested 100% in S&P 500 (SPY).
    • SPY’s annualized standard deviation is 15%.
  • Portfolio 2 is invested 60 and 40 in S&P 500 (SPY) and Investment Grade Bond Fund (FBNDX).
    • Both are 0.31 correlated, based on annual returns.
    • FBNDX’s stdev is 4%.
  • Portfolio 3 is invested 33.34%, 33.33% and 33.33% in S&P 500 (SPY), Investment Grade Bond Fund (FBNDX) and U.S Real Estate ETF (IYR), respectively.
    • IYR is 0.69 correlated to SPY. 0.63 correlated to FBNDX. Correlation is based on annual returns.
    • IYR’s stdev is 21%.

* I initially wanted to backtest them for 30 years, but since IYR was the only real estate ETF I could find with the earliest fund inception date (June 2000), the backtest is from Jan 2001 to Dec 2016.

** Link to the data above can be found here.

Each portfolio is rebalanced annually. Dividends and distributions are reinvested. Taxes and transaction fees are not included.

Here’s the growth of each portfolio over the past 16 years.

3 Portfolio Backtest (Inflation Adjusted). January 2001 – December 2016
  • Port 1 has returned annual growth rate of 3.26%, after inflation.
  • Port 2 has returned annual growth rate of 3.36%, after inflation.
  • Port 3 has returned annual growth rate of 4.75%, after inflation.

Portfolio 1 and 2 have very similar returns. However, the traditional 60/40 portfolio (port 2) took much less risk than all-in portfolio (port 1).

Port 2 had a maximum drawdown of 35% while port 1 had 51%. Portfolio 2’s standard deviation (9%) was almost half the stdev of portfolio 1 (15%).

Port 3, on the other hand, had 45% max drawdown with a standard deviation of 11%, both in the middle of port 1 and port 2. However, they returned much higher.

3 Portfolio Backtest. January 2001 – December 2016. The “Final Balance” and “CAGR” numbers you see above are not inflation-adjusted.

Also, port 3’s Sharpe ratio, Sortino ratio, and Treynor ratio are all higher than the other two.

There are a lot of things to look at when determining which portfolio might be the best for a long-term investor. My favorite is portfolio 3, although the volatility is higher than portfolio 2. REITs (in port 3) provide a strong portfolio diversification with lower exposure to market volatility and attractive dividends.

You can see the backtest here for yourself.

Investors vs. Mr. Market

Downside protection strategies may help prevent investors from their bad habits of overreacting to downside volatility and incorrectly timing the market, missing the boat of high returns. Over the past year, S&P gained 18.10% while an average investor gained half of the growth.

S&P 500 vs Average Investor Return.
1-Year up to September 8, 2017.
Source: Openfolio

If you are a passive investor, consider downside protection strategies to limit volatility and build wealth over the long-term.

Diversify portfolio with:

I endorse the idea of employing a multi-asset strategies that lower the downside potential while increasing the upside potential or even decreasing the upside potential less than the decrease in the downside potential.

I am not saying you should allocate your portfolio to every asset there is. It depends on your goals, lifestyle, risk preferences, your responsibilities, the investment % of your overall capital, etc etc etc.

How you allocate each security is up to you (or your financial advisor), or me me me me.

No portfolio is risk-free, but minimizing the downside can help mitigate the pain inflicted by market “fire and fury” and a changing risk landscape in globalization era.

If you have any questions/comments/suggestions, feel free to contact me personally and/or leave a comment below.

PS: Maybe make Bitcoin/Ethereum/Litecoin 5% of your portfolio.

PS: Active traders should also minimize the downside risk, especially if you work, have school, etc.

PS: Never mind. Thank you for reading. Don’t forget to subscribe.

Couple of Announcements

1st Announcement

On the morning of Wednesday, May 10, I decided to check the Facebook notifications. Before I can check it, the first thing I see on the timeline is an article from Wall Street Journal (WSJ) that a friend shared a couple of minutes before. The article was titled “Sorry, Harvard and Yale, the Trading Whiz Kids Are at Baruch College.”

Baruch College, a city college that I attend, got mentioned on WSJ. Big deal. And it has to do with trading. Big deal.

Minutes after I finished reading the article that morning, the article started spreading around like a wildfire. It was the talk of the town.

The next day, I decided to stop by the trading floor at my college quickly to export important statistics to PDF. What I didn’t know was that CNBC was about to go live.

So I’m sitting on Bloomberg Terminal desk with a trader discussing the current events and S&P 500. We were in a deep conversation and CNBC decided to live stream a portion of our passionate conversation…on mute, unfortunately.

Khojinur Usmonov discussing the current events and S&P 500 Index with another trader
Source: CNBC, “Nation’s top trading club comes from New York public college

First I was interview by Bloomberg. Now, I was on CNBC live, but not interviewed. In other words, millions of people watching CNBC did not know my name. Say my name.

Interviewed By Bloomberg

I’m proud of Baruch College.

2nd Announcement

Read this thread:

As to blogging, I’m not 100% sure if I will be able to write articles. If I can, I plan to write it and publish it here on Out of WACC. If not, you won’t see new articles until the end of August/early September.

Verizon: A Recession-Resistant Dividend Stock (Seeking Alpha Article)

Summary

  • Telecom sector tends to outperform during a recession.
  • Buying Verizon to reduce the volatility of a portfolio and increase dividend yield.
  • Verizon’s unlimited plan will fit in with the crowd.
  • According to customers, Verizon is better.

To keep reading more, click here for the SA article. Or copy/paste: https://seekingalpha.com/article/4071067-verizon-recession-resistant-dividend-stock.