It’s Friday, and that means it’s mailbag day here at The Daily Cut.
First up in this week’s edition… a faithful Cut reader wants to know how she should play the current rally in bitcoin prices.
As usual, crypto expert Teeka Tiwari (Palm Beach Letter, Palm Beach Confidential, Alpha Edge, and Crypto Income Quarterly) has some sound advice…
Reader question: I’m hearing a lot of advice to buy bitcoin. My question is… are you advising to buy bitcoin if we haven’t yet, or are you also talking to those of us who have already bought bitcoin that we should buy more? I’m a little confused.
– Sandra S. (Legacy Research member)
Teeka’s answer: The move above $5,000 has finally broken bitcoin’s downtrend line that was in place since early 2018. And it’s a sign of an emerging trend change from bearish to bullish.
Right now, I’m telling my subscribers that the time has come to start judiciously adding to some of our open positions and lower our overall cost basis.
Let me explain…
Investors will sometimes “double-down” when an investment they own goes lower, but they still have strong convictions of its upside potential. This lowers the average cost basis across their old and new positions and increases their exposure.
For example, say you own 100 shares of IBM at $175 per share for a cost of $17,500. If IBM drops to $100, you could buy an additional 100 shares.
That would double your position size… and lower your cost basis to $137.50. The lower cost basis means the stock doesn’t have to rise as much for you to make your money back.
The drawback of this, though, is you have to come up with another $10,000. So you’re increasing your risk by an additional 57%. That’s a lot of extra dollar risk.
But with crypto, you don’t have to commit thousands of dollars to lower your cost basis. You can use crypto’s volatility to your advantage.
Because prices dropped so low during the bear market – in some cases, 90% – you can scoop up assets on the cheap and really lower your cost basis.
You could increase your dollar investment by 10% or 20% and yet double or triple your position size in some cases. So you can “double-down” without significantly increasing your risk.
If you’re more conservative, just risk 10% more money. And if you’re more aggressive, you can risk 20%.
You know your own financial position best, so I’d urge you to bias to the side of caution. That way, you’ll be putting just a few hundred dollars at risk. But at the same time, it could put thousands back into your pockets when the market rebounds.
Remember: We treat cryptos as asymmetric bets. It’s not about imperiling your current lifestyle for future gain. It’s about taking a small amount of money and magnifying it dramatically. And the swings in crypto are so large, you don’t have to risk huge amounts of money to make huge gains.
Next up, a question about the newest type of investment we’re following here at Legacy Research – warrants. And E.B. Tucker (Strategic Investor & Strategic Trader) has the answer…
Reader question: With respect to the new Strategic Trader service, what is the best way to view charts for the warrants? I get it that we can follow the underlying stock if we want to time when best to buy, but I like charts for what I’m going to buy. Is there a website that has warrants in its database? I haven’t found one yet.
– Kevin M. (Legacy Research member)
E.B.’s answer: We use Bloomberg Professional software to research and track warrants covered in Strategic Trader. The software requires a subscription and is geared for professional traders.
However, many online brokerage firms will display warrant charts. Fidelity, for instance, offers price history charts for warrants, even if you are not an account holder. Just take the warrant ticker symbols from our Strategic Trader portfolio and enter them into the search bar on the Fidelity home page.
While it’s nice to see a chart of a warrant’s price history, we’re more concerned about the future. Our T-U-V system looks at three things: time, underlying stock potential, and volume. Getting in at the right time is imperative. We also want to see the underlying stock is strong and has big upside potential. And finally, we eliminate warrants that are locked up in a few hands.
This helps us know when warrants trade for much less than fair value. That increases the odds of a big move when the underlying stock takes off.
For our last question, let’s focus on another popular topic… Gold. And we’ll turn to one of Legacy Research’s biggest gold bugs – Dan Denning (The Bonner-Denning Letter) – for the answer…
Reader question: I’m from Germany and as a Daily Cut reader, I know that owning physical gold and some gold stocks makes absolute sense as an insurance.
Everybody just talks about how much profit you can make but I’m wondering how do you actually “cash out” during a crisis when fiat money is worthless?
Imagine I make a 10x profit to about €50k during times of fear, panic, or depression.
Let’s say I cash out my gold bullion at an all-time high to fiat money. What do I do then with the fiat money?
The €50k isn’t that much that I can immediately buy a house. And if I keep it as fiat money, it might depreciate extremely fast, as we had with the Hyperinflation during the Weimar Republic.
Normally, I assume people would have converted their profit into any other safe haven (USD or CAD). But if this turns out to be a global crisis, and all major fiat currencies have the same issue, I wonder what the best option will be, then?
Some feedback or ideas would be very much appreciated.
– Victor K. (Legacy Research member)
Dan’s answer: Interesting question. But from my perspective, the premise is slightly off.
You’re not looking to cash out during a crisis and sell your gold. You’re certainly not looking to make a gain in fiat currency terms.
Having some of your assets in gold is a way to get to the other side of the crisis when another medium of exchange (usually another fiat currency) emerges that’s more stable.
What do you spend in the meantime? NOT GOLD, if you can help it. Smaller-denomination silver (which is why a lot of people “stack” silver). History shows many other tangible items being used to barter (cigarettes, gas, vodka, bullets).
And in the early stages – before it circles the drain – you could use cash itself. It’s amazing how few people have a month’s worth of cash on hand… or could scrape it up in a pinch.
In the early days of an emergency, having a stack of cash around would prove quite useful.
In the long term, hold that gold.
Our last reader emails aren’t questions at all. But they deserve an answer, nonetheless…
Reader comment: Bill Bonner, what a great job you do with the Diary! I sure would like to visit your ranch. Please keep posting photos!
– Joe H.
I couldn’t agree more. I love Bill’s ranch stories and photos, too. And we’re certainly not alone…
Reader comment: Bill, I like your writing(s) about the ranch more than I do the financial stuff that I’ve read about the last few days. Keep it coming!
– Richard S. (Legacy Research member)
Reader comment: I’m really fascinated with all of your Argentine adventures. Your difficulties there so remind me of the ranchers I talked to in South Africa, who were having their properties taken from them under the guise of reparations. I fear it’s turning into another Zimbabwe.
I, too, love Argentina, especially Iguazú Falls. You been there?
Anyway, keep up the good work.
– Judson S. (Legacy Research member)
If you want to see more of Bill Bonner’s ranch photos – or if you’re adventurous enough to make the trek down to Gualfin – check out the website Bill’s folks down there set up… http://www.gualfin.com/
Have a nice weekend.