With Bitcoin continuing its impressive weeks-long run higher – read Thursday’s issue for the full details of how we called this jump – our mailbag was full of crypto questions.
But before we get to that, one reader is confused by the layout of some of the Legacy Research portfolios…
Reader question: There are columns labeled “Return” and “Yield.” In some cases, the figures in these columns are vastly different. I don’t understand how an asset can have a return of 98.5% but only a yield of 10%. Please explain.
– Paul G. (Legacy Research member)
Good question. Let’s start with Yield, which is short for Dividend Yield. The percentages you see in this column simply reflect a stock’s annual dividend divided by its current price.
So let’s assume we have a stock that’s trading at $50 per share and pays an annual dividend of $5… Well, then the Yield column would show 10%.
Return, on the other hand, shows your total gain (or loss) on the position. So it factors in the change in the stock’s price, as well as any dividends you’ve collected along the way.
Let’s use that $50 stock again for our next examples.
If we bought it at $25, and it hasn’t paid a dividend yet, the Return calculation is easy… From $25 to $50, the stock has doubled, so the Return is 100%.
Now, let’s assume we’ve held that stock for five years. That means we’ve collected five annual dividend payments of $5 per share. That’s $25 in dividends.
When you add that to the $25 per share of price appreciation you enjoyed thanks to the stock’s run up to $50, that brings the total value of your investment to $75 – a Return of 200%.
Hope that clears everything up.
Now for those crypto questions…
First up, Nick Giambruno (The Casey Report and Crisis Investing) fields a popular question about gold-backed cryptos…
Reader question: Hi Nick. Could you please kindly explain how cryptos backed by gold would appreciate in value over and above the appreciation in the price of gold backing it? Kind regards.
– Kiran S. (Legacy Research member)
Nick’s answer: To capture the really large gains – above and beyond the price appreciation of gold – we need to invest in the underlying companies and projects issuing the gold-backed cryptos, not the cryptos themselves. You see, unlike Bitcoin, gold-backed cryptos have one foot in the digital world and one foot in the real world.
A crypto backed by a physical asset such as gold has third-party and counterparty risk in a way an unbacked cryptocurrency, like Bitcoin, doesn’t. Somebody has to be responsible for that backing, and they don’t work for free (nor should they).
The companies and projects running gold-backed cryptos necessarily take fees like any other gold storage company. And if gold-backed cryptos really take off like I expect them to, these companies and projects should become immensely profitable.
Just remember, there are dozens of gold-backed crypto projects. They each have different attributes and they certainly aren’t all created equal. I recommend what I believe to be the best gold-backed crypto project in my advisory Crisis Investing. It’s simply the best way to profit from this monetary revolution.
If you’re not a paid-up Crisis Investing subscriber yet, don’t worry. You can find out more about gold-backed cryptos – and how to get two years of Nick’s elite service at a 70% discount – right here.
For our second crypto question today, a reader wants to hear about volatility from Teeka Tiwari (Palm Beach Letter, Palm Beach Confidential, Alpha Edge, and Crypto Income Quarterly)…
Reader question: I have a question for Teeka. Teeka, do you think the crypto market will become less volatile when the big players you’ve mentioned come on board? Thanks.
– Ruth R. (Legacy Research member)
Teeka’s answer: Over time, yes, but while this asset class is small (sub $1 trillion) we will still see a lot of volatility. Think of it as a similar process that internet stocks went through.
When the internet sector was young, it was small and highly volatile. As it became more mature and an acceptable asset for large institutions to invest in, volatility gradually wound down.
However, let me be clear… volatility in crypto is a blessing, not a curse. It’s because the market is so small and so volatile that you can take a tiny investment and greatly magnify it.
That opportunity will cease to exist once this becomes a mature asset. We embrace this volatility for the life-changing opportunity it represents and mitigate that risk through small, equal dollar-sized positions across a broad portfolio of crypto investments.
Next up, Marco Wutzer (Disruptive Profits) takes on a four-part crypto question…
Reader question: A couple of questions for Marco Wutzer…
Doug Casey, Nick Giambruno, and others seem confident some type of financial crisis is looming. How do you expect cryptos to hold up in a financial crisis? Do you think there is enough acceptance that people will trust in cryptos to protect them? Or are people more likely to abandon cryptos (as a speculative play) and go to cash, gold, and other “safe havens”?
Would a financial crisis be a time where cryptos backed by gold are the ultimate play? Thank you.
– Ted D. (Legacy Research member)
Marco’s answer: The crypto market has been in its own financial crisis for over a year. Recently, we have seen some positive momentum. However, this might be a bull trap, and we might see another leg down in the coming months. That being said, I am confident that we are close to the bottom in the crypto market.
When it comes to the global financial markets, cryptos have shown themselves to be relatively uncorrelated. In other words, what happens on Wall Street, the commodity markets, or overseas has only a small impact on cryptos.
I think there will be a severe crisis in many emerging markets and in Europe where it will lead to the breakup of the European Union. We live in a globally connected world. That means international capital will flow towards relative safety. Large pools of money will flow to the U.S. I think the Dow Jones, precious metals, and yes, cryptos, too, will make new all-time highs.
It’s important to keep the big picture in mind: We are in the early stages of a move towards decentralized peer-to-peer capital markets, or what I call the Blockchain Ecosystem. There will be plenty of ups and downs over the coming years, and it’s important to accumulate valuable tokens – like the ones I cover in Disruptive Profits – when crypto markets are weak.
With regards to gold-backed cryptos, there is certainly a niche for that. I think tokenized assets and security tokens will become a multitrillion-dollar market. But it is even more important to own tokens in the blockchains and protocols that make the whole Blockchain Ecosystem work. It’s like owning a part of the new internet of value.
Before closing, I (James) need to say a few words about Bill Bonner…
Around the Legacy Research offices, I’m known as “Bill’s biggest fan.” That’s a title I wear proudly. And today, I’d like to give you two reasons why…
Last week, Bill penned two essays that I rank among his all-time best:
Now, I’ve been reading Bill’s Diary every day for almost a decade. And I also had the great honor of being his editor for three years. So for two essays to stand out the way last week’s did… you know they’re exceptional.