Trade Alert: Building out my basket of cryptocurrencies
After this Trade Alert, I’m going to cut back on my cryptocurrency posts here for a while. Maybe once per week, I’ll talk cryptocurrencies and the rest of the time, I’ll spend on analyzing stocks, the economy, the news, policies and so on. I’ll also have the full transcript for this week’s Livestream Q&A sent out in two pieces over the weekend so stay tuned in that. If you can’t wait for the transcript, you can watch a replay of the Livestream on Facebook here or on YouTube here or you can listen to the podcast version of it on iTunes here or on Soundcloud here. Anyway, onto the Trade Alert, which explains why I’m going to go ahead and nibble two more cryptocurrencies that I do think are likely to survive. Those two are Ethereum ether ETH and Ripple XRP.
If 90% or more of the current batch of cryptocurrencies that retail investors can buy into are crappy, silly or especially scammy and are headed to zero, that would mean that nearly 10% of the current batch of cryptocurrencies are likely to survive.
Yesterday, the SEC issued more guidelines and commentary explaining that they don’t consider Bitcoin or Ether (see What is Ether – Ethereum.org – Ether is a necessary element — a fuel — for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to…) are securities.
And their explanation as to why basically separated currency-like coins and tokens from equity-like coins and tokens, made a lot of sense to me (and to be sure, there’s nothing wrong with issuing/investing/trading equity-like coins and tokens, but such things certainly should and do fall under the purview of the SEC). Here are some of the most important comments that William Hinman, head of the Division of Corporation Finance at the SEC, made in a speech at the Yahoo All Markets Summit: Crypto conference in San Francisco:
“Promoters in order to raise money to develop networks on which digital assets will operate, often sell the tokens or coins rather than sell shares, issue notes or obtain bank financing. But, in many cases, the economic substance is the same as a conventional securities offering. Funds are raised with the expectation that the promoters will build their system and investors can earn a return on the instrument – usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases.
As an aside, you might ask, given that these token sales often look like securities offerings, why are the promoters choosing to package the investment as a coin or token offering? This is an especially good question if the network on which the token or coin will function is not yet operational. I think there can be a number of reasons.
But this also points the way to when a digital asset transaction may no longer represent a security offering. If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.
And so, when I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprise. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value. And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value. Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.
“Hinman specifically said that bitcoin is not a security because it is decentralized: there is no central party whose efforts are a key determining factor in the enterprise. In addition, ether is also not a security because the ethereum network is also decentralized.
Regarding ICOs, Hinman also acknowledged that some digital assets could be structured more like a consumer item than a security, particularly if the asset is purchased for personal use and not intended as an investment. He seemed to imply that these types of offerings — an investment in a book club, or a golf club membership, for example — were likely not securities.
Hinman defended the SEC’s strict interpretation of securities laws, noting that, ‘There is excitement and a great deal of speculative interest around this new technology. Unfortunately, there also are cases of fraud.'”
Word to your mother, there’s a LOT OF FRAUD in the current world of ICOs and cryptocurrencies! You know that’s been a large part of my analysis as to why I’m so bearish on the current batch of cryptocurrencies.
So let’s get back to the lede of this report and Flip It and get onto the Trade Alert.
If 90% or more of the current batch of cryptocurrencies that retail investors can buy into are crappy, silly or especially scammy and are headed to zero, that would mean that nearly 10% of the current batch of cryptocurrencies are likely to survive. And if cryptocurrencies are going to help people in oppressed nations like Venezuela, Iraq or most any developing economy…and if blockchain technologies are indeed the future of how we control our data, our economic/financial transactions and so much else…
Then I think we need to extend our small basket of cryptocurrency holdings from just bitcoin and Stellar Lumens to a few more cryptocurrencies/tokens that are also looking ever more likely to survive…and then thrive as they revolutionize economies and markets.
So I’m going to go ahead and nibble two more cryptocurrencies that I do think are likely to survive. Those two are Ethereum ether ETH andRipple XRP. Here’s some info on how to buy Ethereum ether and how to buy Ripple.
Now to review and to be clear, I own some bitcoin that I’ve owned for like five years with a cost basis around $100 or so but I’ve trimmed most of it. And I’ve recently started nibbling a tiny bit of some Stellar Lumens with a cost basis around 29 cents.
And now I’ll own a tiny bit of Ripple XRP with a cost basis around 55 cents and Ethereum ether ETH with a cost basis around $500.
My bitcoin position is by far the largest of the four, courtesy of the big gains I have on the remaining bitcoin I own, though it’s a small fraction of the number of total bitcoins I owned five years ago (I also lost some of my bitcoin at MtGox). The other three here are tiny positions for me for now, though I do plan on occasionally nibbling on some more of them in weeks and months ahead, hopefully at lower prices as The Great Cryptocurrency Crash continues to play out before The Cryptocurrency Revolution takes hold into the decades ahead. I also expect that some of what will become the biggest cryptocurrencies of the next thirty years aren’t even available to buy yet or aren’t even conceived of yet.
I’ll leave you with this rhetorical question I asked my Trading With Cody subscribers back in 2013 in a article:
How crazy is it to own a little bitcoin as an alternative currency and hedge to your dollars or euros or whatever? Well, let me put it this way – For the next thirty years, would you rather own:
- Bitcoin
- Dinars from Iraq
- GLD (not physical gold, but the paper promise of gold from corrupt TBTF banks)
- Or the Venezuelan Bolivar.
