Bitcoin Is More than Just a Price

A lot happened overnight.

Fed Chief Powell spoke, the tech giants announced massive profits, London-based Rio Tinto did the same, and the recent Bitcoin [BTC] surge hit US$40k.

The ‘news’ from the Fed wasn’t really news at all. That is, the Fed will taper, maybe, at some point, when the economy is stronger. But not yet.

The market liked that, of course…

And then there were the big corporate results. You can focus on the monopoly-type profits, or you can focus on the share price reaction. I prefer the latter, because it tells you what was already priced in prior to the results release.

So let’s have a look…

Apple’s share price declined 1.2%.

Microsoft was off a slight 0.1%.

Google fell 0.3%.

In other words, these bumper second-quarter profits were largely priced in. That’s despite the fact that revenue and profits ‘beat’ expectations. That’s just a tired, old PR game that firms and Wall Street play. It makes for an exciting headline on CNBC, but ‘the market’ isn’t fooled.

The fact that the near-term good news is priced in doesn’t mean these companies can’t continue to do well. It all depends on future demand for their services. But one thing is for sure, they’re going to come up against very tough comparable sales and earnings numbers from the fourth quarter onwards.

That is, in the second half of 2020, their monopoly-type businesses benefitted hugely from the global lockdowns. Sales and profits soared. What will the year-on-year growth look like as the world slowly returns to normal? Will their share prices justify such high-growth multiples?

That remains to be seen…

In London, Rio Tinto announced a massive profit, thanks to China’s iron ore demand. From The Australian:

Rio Tinto will pay out $12.4bn in half-year dividends after the iron price boosted its profits into record territory and the mining giant found itself in a net cash position for the first time in more than a decade.

Rio declared a $US5.61 ($7.63) a share interim dividend on Wednesday as the company jumped to a $US12.2bn underlying profit for the first half of the year, up more than 150 per cent from the first half of 2020.

The extraordinary result comes on the back of strong commodity prices as Chinese demand for raw materials surged in the half.

The share price jumped 1.4%, as the massive dividend clearly enticed investors. What will be interesting to see is how the stock trades ex-dividend. It looks very cheap on a PE of around five times forecast FY22 earnings. But resources are cyclical stocks. Low PEs often mean peak earnings. That could well be the case for iron ore companies.

And then there was (is) the continuing resurgence of bitcoin.

Is the worst over?

Quite possibly, although no one knows for sure.

The thing to keep in mind with bitcoin is that it’s not always about the token’s value (the bitcoin price). That, viewed in isolation, is practically useless.

What gives the token its value is the underlying technology. That is, bitcoin is a distributed ledger technology that allows peer-to-peer payments. There is no need for a middleman. Oh, and your capital is ‘self-custodied’, which means no third party holds it on your behalf and can do funky things without your say so.

For example, consider the shares in your super fund. In some situations, your super fund can lend your shares out to short sellers and receive a fee for doing so. As far as I’m aware, that fee doesn’t accrue to you, although in some cases it may be ‘shared’.

This is especially so in the case of zero commission outfits like ‘Robinhood’. You know, the share trading outfits on the side of the ‘little guy’.

Well, like so much that happens in this upside-down world, what it says on the tin is exactly the opposite of the underlying intent.

Robinhood steals from the poor and gives to the rich. We already know that Robinhood sold the order flow of the ‘little guy’ to hedge fund giant Citadel so it could front-run the trades. But there is also a simpler way that Robinhood makes coin…by lending its clients shares to short sellers and taking the fee for themselves.

This was especially lucrative in the recent GameStop share price games. While the WallStreetBets crowd were trying to ramp up the share price to hurt the short sellers, Robinhood was lending those shares to the very hedge funds trying to drive the price lower!

As this article explains…

Investors using Robinhood have agreed to let Robinhood lend the shares.

With high demand for shares to lent and a low float of shares, Robinhood make premium bucks renting the shares “bought” by the WSB [Wall Street Bets] community to those hedge funds and other agents wanting to short GameStop.

Further, Robinhood clients have accepted that Robinhood keeps all the proceeds from lending shares. Many other brokers (mainly the prime brokers) share the proceeds from lending with the client.

There’s a saying in business: “When you aren’t paying, you’re the product.” For Robinhood, this is indeed the case.

Their clients (and their demand for securities) are the product, and market makers buying the order flow and short-sellers borrowing shares to short-sell are the customers.

It shouldn’t come as a surprise that Robinhood’s business model has flourished during the latest government spending spree. Easy come, easy go.

It should also not come as a surprise that the crypto market (and the world of distributed ledger technology) has also really flourished during this period.

That’s because there is a growing realisation that the traditional financial system is in its late, degenerate stage. There is no other playbook than to create more debt. And more debt only adds to the debt deflation dynamics that will eventually crush the global economy.

Bitcoin is the basis of a new monetary system. It’s not just a speculative token. It’s the free market’s response to a corrupt, centralised financial system that benefits the 1% and screws the 99%.

Whether you have a stake in this new system or not, it’s important that you’re thinking about it in the right way. As that will give you the resolve to hold on through the turbulence of the price discovery phase.

To help you do that, I encourage you to keep an eye out for our brand-new report, ‘How to Play the New Game: A 5-Part Guide for Exploiting the Crypto Sell-Off’.

It will hit your inbox tomorrow…


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Greg Canavan,
Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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