A Saner Head Is Prevailing in the Crypto Space

Joel's note: Starting today, we're doing something new in Altimetry Daily Authority... We'll still feature our stock or idea of the day, but we'll also begin to include other things that may interest you – whether it's an article, a podcast, something from my travels, or an opportunity I think could benefit you. Send your thoughts on this new format to [email protected].

'What do you think about bitcoin and cryptocurrency?'

I was teaching an MBA class in Cambridge over the summer, and during the break several students came up and asked me that question. It's one I've gotten regularly over the past three years.

Our specialty here at Altimetry is Uniform Accounting, and the MBA courses I teach have nothing to do with cryptos – we're analyzing the world of companies. But I can't just not answer.

At this point, I have something of a canned response for this question and others like it. Obviously each question is different, but generally my response is something along the lines of...

Just based on diversification alone, you shouldn't hold a significant amount in any of these cryptos. I don't have an opinion on which should be the winner. But if you think of them the same way you think of gold or venture capital, cryptos should probably be a small sliver of your portfolio, not the entire thing.

It doesn't always end the conversation, but normally students are satisfied with my answer. I'm just giving my honest opinion, which is really that I don't know. But if I had to apply a logical framework, that would be the one I'd think of.

I've also generally preferred to keep my distance from the crypto arena because the stories about questionable characters, massive daily swings in prices, and whether the economics of the cryptos are justified frankly spook me.

But I recently sat down with Eric Wade, who writes the Crypto Capital newsletter at Stansberry Research, and I was pleasantly surprised by his viewpoint...

Eric is one of the first people I've talked to in the crypto space whom I've heard speak rationally about factors like portfolio sizing.

He's also one of the first who's given me a real answer on how to do fundamental research into these assets, so investors can really understand the supply and demand dynamics and other factors that will drive how the trade plays out.

Here at Altimetry, we don't recommend making any single investment worth more than 2% to 4% of your portfolio. Many great investors talk about position sizing as finding an optimal balance between having sufficient diversification so no one stock can blow you up, and seeing a guaranteed benefit to your portfolio by making the right investments.

So it was music to my ears when one of the first things Eric said was his view that, overall,  cryptocurrencies should only make up 3% of your portfolio. Basically, these highly volatile, speculative investments should be treated the same way you'd treat a higher-risk stock.

Most of the marketing and articles you read on cryptos talk about them as though you should go all-in on any given crypto, because it's going to go through the roof. It was refreshing to hear that someone level-headed existed in the space.

But what impressed me the most was Eric's overall research philosophy...

In the meeting, he took me through his investment process. He does a lot of research into things like who is holding different coins and analyses on buyer and seller volumes – things he can see because of the transparency that cryptos' underlying blockchain technology provides.

In investing, we talk about following the "smart money" in looking at quarterly 13F reports... and Eric discussed how he's doing that in real-time.

Similarly, he acknowledged that there are a lot of questionable characters in the space and nonviable business opportunities. He does real, fundamental research to avoid these types of cryptos.

For instance, he told me about MilkCoin – a coin that came out to finance agriculture investments in a Russian territory in 2017. In this case, he would have looked at the actual potential value of the assets the coin was tied to, and the initial coin offering ("ICO") size to understand if there was actually an investment opportunity at all.

That's real research an equity investor can respect.

We still won't be recommending cryptos here at Altimetry anytime soon. But at least now, when my MBA students ask me about cryptos, I know there's someone I can point them to... Someone who I think has a thoughtful answer.

If you're interested in hearing more of Eric's thoughts on cryptos, he's hosting a free webinar this Wednesday, November 20. You can register for the webinar here. Again, it's totally free. I recommend anyone who is interested in the space to listen in.

Rob Spivey, our director of research here at Altimetry, hosted a webinar for our institutional clients on Friday…

He had a great discussion about how distorted the as-reported accounting metrics are in the tech and broadcasting spaces. He talked about how Roku (ROKU) actually has positive earnings as opposed to negative, like the as-reported numbers reflect. He also talked about accounting distortions for software giant Microsoft (MSFT), online-travel company Booking Holdings (BKNG), and media companies Discovery (DISCA) and Comcast (CMCSA).

We also talked about Roku on September 18, highlighting how wrong the as-reported accounting is for the company.

We'll have a link available for his discussion on Roku specifically in the next day or so. If you're interested in listening... stay tuned.

Regards,

Joel Litman
November 18, 2019