Welcome to the Friday mailbag edition of The Daily Cut.
This is where you send your most pressing questions to Teeka Tiwari, Jeff Brown, Nomi Prins, and the rest of the Legacy Research team. And we feature their responses.
So if you have a question about the markets or building wealth, email us at [email protected].
I (Chris Lowe) will do my best to get you an answer.
Our first question today is about two of the world’s most beaten-down, out-of-favor investments – bitcoin (BTC) and Ethereum (ETH).
These are the world’s two most valuable crypto assets. They’re also two of Teeka’s top crypto recommendations.
And since they surged to all-time highs last November, bitcoin has plunged 69%. Ethereum has plummeted 75%.
But as Teeka has been showing his readers, that’s not because of a problem with their code, their use cases, or impending regulation.
Instead, investors have been dumping speculative assets from their portfolios en masse because of recession fears.
That’s giving long-term investors an opportunity… if you’re brave enough to grasp it.
That’s not just Teeka’s take.
Former Goldman Sachs (GS) banker Nomi Prins also says crypto will soar again.
She’s our “macro” – or big picture – expert. She recently dove into the crypto market in her daily e-letter, Inside Wall Street With Nomi Prins.
And it has one Nomi reader thinking about the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE).
These are the largest publicly traded bitcoin and Ethereum funds. They trade like stocks in the over-the-counter (OTC) market.
The OTC market doesn’t rely on an exchange like the regular stock market does. Instead, investors trade shares back and forth through a network of broker-dealers.
In short, these funds allow you to have bitcoin and Ethereum in their your portfolio without buying these cryptos directly and storing them yourself.
But are they a good choice for folks drawn in by the bargains on offer in both cryptos right now?
Reader comment: I would like your opinion on buying the GBTC and ETHE as proxies for bitcoin and Ethereum. My discount brokerage does not offer either bitcoin or Ethereum directly.
– Ravi M.
Nomi’s response: Thanks for your question, Ravi.
Many brokerages still don’t offer direct crypto trading to their customers. One notable exception is Interactive Brokers (IBKR). It recently made it easy to trade cryptocurrencies on its platform.
This isn’t an endorsement. And I can’t give personalized investment advice. But if you want to explore other options to meet your investing needs, look at Interactive Brokers’ services.
GBTC and ETHE give you exposure to the price movement of bitcoin and Ethereum from any brokerage account that lets you buy OTC stocks and funds.
They’re convenient and secure ways to invest in bitcoin and Ethereum. But they have some disadvantages over buying these cryptos directly…
The Grayscale funds don’t trade 24/7. OTC market hours are 6:00 a.m. to 5:00 p.m. ET on weekdays.
But bitcoin and Ethereum themselves, like all cryptos, trade 24 hours a day, 7 days a week worldwide.
So if bitcoin prices crash while the OTC market is closed, investors in these funds could face a liquidity crisis. Meaning when the OTC market opens, investors will try to sell all at once. That would leave the market with too many sellers and not enough buyers.
This is less important if you take a long-term approach to your crypto investments, as I recommend. But it’s still worth noting.
Grayscale charges high management fees. GBTC charges a 2% annual management fee. ETHE has an annual fee of 2.5%. That’s steep compared to similar funds.
The average stock market mutual fund charges an annual management fee of 1.43%. The average exchange-traded fund (ETF) charges 0.53%. And plenty of ETFs today have no management fees.
Grayscale comes with potentially high “premiums.” The difference between the market price and net asset value (NAV) per share is important to consider.
Until recently, GBTC traded on a 20% to 30% premium to its NAV. You paid 20% to 30% above the price of bitcoin to own shares in GBTC. That premium shot as high as 100% in the 2017 bitcoin mania.
This happens because whenever bitcoin’s price surges, performance-chasers flood into GBTC. This pushes the price of its shares above the price you could buy bitcoin directly for on a crypto exchange such as Coinbase (COIN).
So why pay an expensive premium when you can buy bitcoin directly from an exchange?
On the flip side, GBTC shares can trade at a discount to its NAV. Meaning you can pick up bitcoin for less than you’d pay if you went directly to an exchange.
That’s the situation we’re in today. GBTC now trades at a nearly 31% discount to its NAV. And ETHE trades at a roughly 26% discount to its NAV.
Don’t go all in. I recommend you invest a fixed dollar amount into each – or into bitcoin and Ethereum directly – regularly. Say, once every two weeks or once a month.
This is called dollar-cost averaging. If you buy an investment at a fixed dollar amount on a regular basis, you’ll avoid making one lump-sum investment right near a peak. Instead, you’ll make a bunch of smaller investments spread out across different prices.
Force yourself to buy when these assets are selling for cheap, as they are today. That’s how to make truly life-changing gains as an investor.
The cheaper the price you pay to own an asset, the higher your returns will be over the long run. So the best time to invest is when no one else wants to.
Next, a question about the options market for master trader Jeff Clark…
He’s a self-made multimillionaire who managed $200 million in Silicon Valley for two decades.
He predicted the 2008 and 2020 crashes, among dozens of other accurate calls dating back to 1987’s Black Monday.
And on Wednesday, he revealed a new trading strategy that can deliver explosive profits even in a bear market.
He says it can convert this chaotic market into contract-backed income – and a potential $10,440 every two weeks – with $0 upfront. He backed up those claims with proof in an online briefing Wednesday. If you missed that, check it out here.
Jeff knows all about booking massive profits during bear markets.
During the 2008 crisis, his subscribers had the chance to make transformative wealth – while there was disaster everywhere.
That was the year the subprime mortgage market melted down… Bear Stearns and Lehman Brothers hit the wall… and the S&P 500 plunged 38%.
Newsletter industry legend Porter Stansberry was Jeff’s publisher at the time. Here’s what Porter wrote on January 29, 2009…
Jeff’s trading this year in The S&A Short Report [Jeff’s old trading advisory] was nothing short of heroic. He made 52 recommendations – all of them short-term trades. Out of these, 42 made money. A win rate of more than 80% in options trading is ridiculous. The average return of every trade was a bit more than 31%.
That’s outrageous when you understand the short duration of these trades and the turnover in the portfolio. How outrageous? The cumulative total return was greater than 1,700%.
You can find out more about how Jeff plans to help you profit from the current bear market by watching his briefing here.
Jeff is also an expert on the options market. It’s where investors make side bets on stocks by buying call options (bullish bets) and put options (bearish bets).
Today, one of his readers wants to know more about the role of options market makers – the folks who offer to buy and sell options contracts at certain prices.
Reader question: Those stinking market makers. I can’t count how many times I’ve tried to make a trade immediately following one of your recommendations only for the stock price and/or option price to immediately move out of its buy range.
Could you explain how these market makers operate? I would love to hear your thoughts on this.
Jeff’s response: That’s a terrific question, Ryan.
Market makers make sure markets run efficiently by offering to buy and sell assets at certain prices. They make a profit by charging a “spread” – or difference – between the two.
A market maker might offer to buy an asset at $100 and sell it at $100.05. That may not seem like a lot, but when they do this thousands of times a day, those small spreads can lead to big profits.
Options market makers have a modest influence on stock and option activity in the short term. They’re neither as powerful nor as evil as you think.
When option orders hit the market, market makers take the other side of your trade.
So if you’re trying to buy call options, the market makers are selling them to you. You’d make money if the stock goes up. And the market maker would lose money.
Now, imagine what happens when buy orders for thousands of call options flood in. Market makers meet this surge in demand by buying the stock.
The option price moves up as everybody rushes in to buy at once. And the stock rises because the market makers rush to buy it to offset their positions.
But if this happens solely because of a newsletter recommendation, the spike is temporary. The greater market forces at play will eventually bring things back to normal. Options and stock prices will almost always come back to pre-recommendation levels within a few hours.
That’s why I advise my subscribers not to chase option prices. You’ll almost always get a chance to get into a recommended trade once the initial buy rush fades away.
In Monday’s Cut, I hammered home the one thing you must do to prosper in this downturn – stay the course.
We just had one of the worst first halves of a year in history.
Crypto isn’t the only market down big. There have also been brutal routs in biotech stocks, SPACs (special purpose acquisition companies, aka blank check companies), and stock warrants.
These are all speculations we’ve recommended to our readers.
But that doesn’t mean you should panic sell. As I showed you on Monday, that’s almost always the wrong thing to do.
Teeka has been pounding the table on this perhaps louder than any other analyst at Legacy. And his readers have been in touch to thank him…
Reader comment: Since 2016 – when I first started investing using your newsletter – I’ve been through a few ups and downs. I took your advice and only put in money that I could afford to lose.
Then I watched it, but only periodically. When it went down, I listened to your updates.
In the last run up, my $15,000 portfolio went to $250,000. I finally thought, “I’m 70. If this is going to be life-changing money, I should start changing my life.”
So I leased my wife a brand-new Lexus IS 350 F-Sport and bought myself a new C8 Corvette. I still had $180,000 to let ride. It’s now down to $70,000 or so.
Did I lose more than half of my money? Of course not. If it were to go to zero, I’ve already done great.
But I am certain you’re right. Things will bounce back. I’m expecting the portfolio to be back well above $250,000 – and probably faster than my retirement fund recovers.
– Bill P.
Reader comment: Hi, Teeka. I followed your advice about position sizing when you first recommended [a smart contracts pick]. I don’t recall the exact price, but it was pennies. I bought $104 worth.
Imagine my surprise when I checked the account a few years later to sell a little of something to buy a new recommendation.
Just that one coin had increased in value to $50,000!
That makes becoming a Palm Beach Infinity member the best financial decision I’ve ever made.
Thanks so much for your and your staff’s dedication to digging up the fabulous research you provide us!
– Michael M.
That’s all for this week’s mailbag.
If you have a question for anyone on the Legacy team, be sure to send it to [email protected].
Have a great weekend.
July 15, 2022