A brutal year for cryptocurrency investors… Teeka Tiwari – This is how I get through bear markets… How the “Crypto Winter” ends… In the mailbag: “Drugs should be treated the same as abortion”…

The “Crypto Winter” grinds on…

Last year was a brutal one for cryptocurrency investors.

After reaching an all-time peak last January, the crypto market cap – the sum value of all tradeable cryptoassets – sunk by 81%.

And bitcoin, the most valuable crypto, plunged 72%.

Take a look…


It’s what some crypto investors are calling the “Crypto Winter” – a long, steep, and excruciating downdraft in prices.

And we have our fair share of crypto investors here at Legacy Research…

As regular Daily Cut readers know, colleague Teeka Tiwari was one of the first analysts in our industry to start recommending cryptocurrencies.

Teeka added bitcoin (BTC) to the model portfolios at Palm Beach Letter and Palm Beach Confidential in April 2016 – long before it became headline news.

Since then, even after the big drop last year, bitcoin is up 740%. That’s enough to turn every $10,000 grubstake into $84,000.

Teeka also recommended what is now the world’s second most valuable cryptoasset, ether (ETH), back when it was just launching. It’s the cryptoasset associated with the Ethereum network.

Despite the selloff last year, it’s up 1,248% in Teeka’s model portfolios – enough to turn every $10,000 into $134,800.

And impressive as those gains are, Teeka has scored even bigger winners.

His top recommendation is NEO (NEO). Like Ethereum, the NEO network (formerly called AntShares) runs “smart contracts” – in other words, code that you can run in a decentralized and tamperproof manner.

In fact, NEO is the top-performing recommendation across all Legacy Research advisories. And it may stay that way for a long time.

NEO is up 5,929% since Teeka added it to the Palm Beach Confidential model portfolio in February 2017. That’s enough to turn the same $10,000 grubstake into a potentially life-changing $602,900.

But there are losses in Teeka’s model portfolios, too…

We’re not going to sugarcoat it. Some of Teeka’s open crypto recommendations are down by more than 90%.

That’s what happens when an entire market tips over like the crypto market did last year.

But thanks to Teeka’s strict focus on risk management (more on that below)… even after all the selling last year, the average gain for the crypto recommendations at The Palm Beach Letter is 130%.

And the average gain for the crypto recommendations at Teeka’s more elite Palm Beach Confidential service is 238%.

That’s since April 2016… Over that time, you would have earned about 34% in the S&P 500.

Of course, that’s looking backward.

2019 Roundtable Series

In our Roundtables, we pin down the threats and opportunities our analysts across Legacy Research see this year and beyond. Catch up here:

Right now, there’s one question on every crypto investor’s lips…

When will the selling end?

That’s why, as part of our ongoing 2019 Roundtable series (see sidebar nearby), we sat down with Teeka for a deep dive on what caused the crypto plunge downturn… and what the catalysts are for the next upcycle.

In our exclusive Q&A below, Teeka discusses the one simple portfolio decision that gives him the fortitude to ride out the downturns in this highly speculative new asset class.

And he reveals why, if you’re purely focused on price as a crypto investor, you’re going to get killed. Instead, he says you need to focus on answering two questions…

2019 Roundtable Q&A With Teeka Tiwari

Chris Lowe: It’s been a wild ride for cryptos over the past 12 months. Where does the recent meltdown rank in terms of previous crypto crashes?

Teeka Tiwari: It’s in the top five, for sure. From September 2010 to October 2010, bitcoin plunged 94%. Then from June 2011 to November 2011, it plunged 94% a second time. We then had 76% between April 2013 and June 2013. And most recently, we got an 85% plunge between November 2013 and January 2015.

Bitcoin Yearly Returns
2010 (partial) 233%
2011 1483%
2012 186%
2013 5507%
2014 -58%
2015 35%
2016 125%
2017 1331%
2018 -72%

What we’re experiencing right now is a serious bear market. But it’s within the normal range of what we’ve seen in the past.

As I told my readers, when bitcoin broke below $6,000 – which is a level of technical “support” – it created a horrible picture on the charts. This gave way to more selling. And that led us to the bear market low of $3,191 in December.

I’ve always said it to folks thinking of investing in cryptos. You have to be willing to watch all your positions drop by 80% or more from time to time.

It’s par for the course with an asset class as speculative as cryptos. If you don’t like that kind of roller coaster ride, they’re not for you.

Chris: What caused the most recent downdraft, in your view?

Teeka: Look, a lot of the time, markets make the news… the news doesn’t make the markets. In other words, we can never say for sure that “X” event caused “Y” percentage drop when it comes to market crashes.

But one major stumbling block last year was the main stock market regulator in America, the U.S Securities and Exchange Commission (SEC). In particular, it came down hard on initial coin offerings (ICOs).

ICOs allow new crypto ventures to raise funding. But instead of issuing shares as regular companies do when they have an initial public offering (IPO), a crypto venture issues digital coins in return for either bitcoin or ether – the two most heavily traded cryptoassets.

And the SEC is causing forced selling of those cryptoassets.

Chris: How so?

Teeka: For the most part, the SEC has left ICOs alone. But last year, it said it was going to regulate them in much the same way as it regulates IPOs. So projects that raised funding – in bitcoin and ether – by way of ICOs are going to have to raise cash to pay expensive lawyers to defend themselves against the SEC.

A lot of them are going to lose. And they’re going to have to pay fines. And to pay those fines, they’re going to have to raise even more cash. And that means selling the bitcoin and ether they took during their ICOs.

That’s why bitcoin and ether have been doing so poorly of late. You’ve got this massive rush to exchange them for U.S. dollars by projects that raised crypto funds via ICOs. These ventures don’t want to sell their bitcoin and their ether. But they have no choice.

Chris: What should investors be focused on now? How can we tell if cryptos are a busted flush… or if they still have a bright future?

Teeka: When I’m figuring out the future of any investment, I look at two things. And this process is particularly important for investments in the technology sector… and I view cryptos as a tech play.

I ask myself two key questions: Are more people using this tech? And is it getting better?

This is the only way to tell if the investment in question has a future. I’m not saying I don’t ever look at prices. That’s just not possible. But I don’t let price be my guiding star when it comes to my assessment.

Mr. Market – as the godfather of value investing, Benjamin Graham, reminded us – is best thought of as a moody teenager. Sometimes, he’s on a high… and is bidding up assets far beyond their fundamental value. And sometimes, he’s in a sulk… and is prepared to sell the same assets for less than they’re really worth.

And as many of your readers will be aware, you don’t want to give the pronouncements of moody teenagers too much thought.

Chris: Can you give a concrete example of what you mean?

Teeka: Let’s start with online retailer Amazon (AMZN). It’s one of the greatest wealth building vehicles in history. Since it went public in 1997, to its all-time high in September 2018, it went up 135,867%.

That would have turned your $10,000 investment into almost $14 million.

But to earn those gains, you would have had to suffer through drawdowns of 56%… 65%… and even 94% during the dot-com bust.

Apple (AAPL) is another good example.

Since it went public in 1980, to its all-time high last October, Apple shares shot up 49,561%. That’s enough to turn every $10,000 into almost $5 million. But those who held on had to suffer through a peak-to-trough loss of 80% – twice. And there were several drops of 40% or more.

Cryptos are a roller coaster – sure. But there’s no gain without pain in the stock market, either.

Chris: Let’s get back to those fundamentals you mentioned earlier. Where are we right now in terms of adoption and innovation in bitcoin and other cryptos?

Teeka: Innovation continues unabated by the price pullback.

One of the big sticking points for bitcoin over the past several years has been slow transaction times. But thanks to something called the Lightning Network, bitcoin transaction times are faster and cheaper than they have ever been.

The Lightning Network is what’s known as a “second layer payment protocol.” Don’t be put off by the jargon. It’s just an overlay of computer code that allows you to create fast payment channels between two users.

Another criticism of bitcoin was the amount of energy the network consumed to verify transactions. The so-called miners – the folks using high-end computing rigs to verify transactions on the Bitcoin network – have to solve complex mathematical puzzles for security purposes. That takes a lot of computer processing power… and a lot of electricity.

The good news is that, today, 77% of the energy use on the Bitcoin network is coming from renewable energy sources. Whereas before, it was nearly all coming from non-renewable energy sources.

By comparison, the gold mining industry and the traditional banking industry use about four times more energy in their operations. For the gold mining industry, most of that energy comes from diesel. And we’d hazard a guess that hardly any of the financial industry gets its energy from renewable sources.

Chris: That’s the pace of innovation. What about the pace of adoption?

Teeka: As my readers know, that’s what I’ve been most focused on lately. I’ve been telling them that 2019 will be dominated by institutional interest in cryptos.

What I mean is the adoption piece of the puzzle will be all about the mainstreaming of this asset class by traditional financial firms. In particular, we have an institutional crypto exchange, called Bakkt, scheduled to roll out early this year.

This exchange is not for mom-and-pop investors like, say, Coinbase. It’s for big institutions, such as hedge funds and wealth managers. And it’s owned by the same company that owns the New York Stock Exchange – the Intercontinental Exchange, one of the biggest exchange operators in the world.

Bakkt was scheduled to launch on January 24. But the launch has been delayed by the government shutdown in Washington. Bakkt needs to secure a special ruling from the Commodity Futures Trading Commission, the regulator for futures and options markets. And this federal agency is tied up with the shutdown right now.

But when the government opens again, the Bakkt launch will be a major catalyst for higher crypto prices. It’s going to be a globally recognized trading platform that every other regulatory agency in the world will approve and work with.

Chris: What else are you seeing in terms of crypto adoption in 2019?

Teeka: Bakkt isn’t the only game in town when it comes to institutional adoption of cryptos as an investable asset class.

There’s also ErisX. It’s backed by major Wall Street firms, including TD Ameritrade, Fidelity, and Nasdaq. And the Nasdaq exchange will soon allow for the trading of bitcoin futures. Without getting into the weeds, these are contracts that allow you to place bets on bitcoin without owning any bitcoin directly.

These Wall Street-backed ventures bring order and legitimacy into what has been a completely unregulated market. That’s what’s going to kick off the next bull market – all that institutional money finally flowing into cryptoassets.

Chris: Do you have any other advice for folks who either own… or are thinking of buying… cryptos? I know you place a lot of emphasis on risk management at Palm Beach Letter and Palm Beach Confidential. Can you tell us more about how you protect your downside as an investor in an asset class as speculative as cryptos?

Teeka: The single most important thing, Chris, is to always be mindful of your position sizing. That’s just a fancy way of saying never bet too much on one crypto. And also make sure your entire crypto portfolio isn’t too big a part of your overall investment portfolio.

As I told my readers, it’s the only way that I can personally survive this type of volatility. I don’t have the mental fortitude to take 90% of my fortune… put it into cryptocurrency… and then watch it drop 90%. I couldn’t deal with that. I’d be a basket-case. But if you have 1% or 2% of your overall portfolio riding on the crypto boom I see coming, that’s a different story.

That will help you stay detached from the year-to-year ups and downs. It will also help you stay focused on what really matters – the pace of innovation and adoption. Ultimately, that’s what’s going to drive price rises over the long run.

Chris: Thanks, Teeka.

Teeka: It’s a pleasure, Chris. Anytime.

Chris here – Teeka’s message couldn’t have come at a better time.

I’m sure there are Daily Cut readers who’ve sailed through the recent crypto storm… and even have some tales to tell. (Share them with us at [email protected].)

It’s never easy going through the kind of downturn we’ve just been through in cryptos. That’s why Teeka’s main points are so important…

  • Cryptos are an inherently volatile asset class. If you can’t stomach the kind of volatility needed to make gains as high as 5,929%… as Teeka’s readers have done… you’re better off steering clear.

  • Mr. Market is a moody teenager. If you’re focused only on price, you’re never going to have the long-term sticking power needed to realize the big gains on the table.

  • What matters in crypto is the pace of adoption and the pace of innovation. And right now, both are steaming ahead.

  • You need to always pay attention to risk management. Keep each position small. And never put too big a portion of your portfolio at risk on speculations such as cryptos.

In the mailbag: “Drugs should be treated the same as abortion”…

Switching gears to the hottest topic in the mailbag, the debate continues… Should all drugs be legal, as Legacy Research cofounder Doug Casey says? Or is he out of his mind?

Doug’s point is all wet. Open drug laws will lead to further moral decay, more costly medical care, more government health costs (which the people pay for), and further the demise of the American dream. Your body is your own to abuse but, when you do, you aren’t the only loser. It costs society both in the loss of what you could have contributed and the costs you pass on to others.

– Jim S.

Drugs should be treated the same as abortion… It’s nobody’s business but the person making the decision. Stop trying to force your beliefs down everyone else’s throats. Believe what you want. Don’t take drugs or have an abortion if you are against it. Period!

– Steven O.

At a high level, you cannot legislate morality, wisdom, or good behavior. You simply make criminals out of people and grow a police state to the utter extreme corpulent size that we have here. Having said that, there are certain substances that are lethal, or upon a single dosage or mistake, could have life-changing negative consequences. I believe it’s better to make it clear that these are far too dangerous and inhibit free circulation of them to the extent possible.

A second point: Legalization unfortunately means heavy handed government regulation most of the time in today’s world. In and of itself, this causes many to become criminals and taxes to be imposed, driving up costs and incarceration rates. This is exactly what’s happening in California now. So the true thrust of policy and practice should be decriminalization!

– John D.

If the War on Drugs is so successful, why can I buy anything I want and have it on my kitchen counter in 24 hours? The only way to stop illegal drugs is to execute ALL dealers (see Singapore – and Singapore and China are both having more drug problems in recent years). Since we are unwilling to do that, let’s admit we failed and legalize it all. Quit trampling on all our civil rights to fight this unwinnable war.

– Robert B.

Is the War on Drugs unwinnable? Should the feds decriminalize drugs instead of legalizing them? Or will it “further the demise of the American dream,” like Jim S. says?

Tell us what you think at [email protected]h.com. We love to get your feedback. And we read every email you send.

Until tomorrow…


Chris Lowe
January 16, 2019
Dublin, Ireland