1) Yesterday, your editor stuck his flag in the ground and said ignore the volatility in the crypto market.
The working thesis: You should either be in it for the long term or don’t dabble.
You can see why I say that today. The Bitcoin [BTC] price has rallied 19% and Ethereum’s 36%.
That’s today.
Yesterday morning I wrote to a friend who’s heavily invested in bitcoin and Ethereum (more than a million dollars)…and the price action was still looking ugly.
He’s a private investor. But I asked him what he’d tell his subscribers (if he had any) on such a big dip.
He told me, in part:
‘From a non-monetary lens bitcoin is a weirdly reflexive asset, so everything bad in the short term is good in the long term.
‘So China banning bitcoin mining in the last week might be bad in the short term, but over the long term it’s probably the most bullish thing in 2 years. It crosses two bear cases:
‘A) That china controls bitcoin and,
‘B) Bitcoin is polluting because it runs on coal in China.
‘Same goes for everything. Elon tweeting bitcoin is bad will move the price short term, but the market eventually becomes immune to it all.
‘Also, man the f*** up. We’re still up 400% on a reasonable time frame. The core thesis is still intact, all investment is speculative so who knows what happens in the future but this is just another Tuesday in crypto.’
Well put, I say!
My colleague Greg Canavan also touched on the importance of viewing this in the larger picture yesterday too. He said:
‘Crypto is in the price discovery phase. No one knows what the real value of each particular coin is.
‘But these coins are the foundation of a new, tech-based financial system that cuts out the “trusted” middleman and replaces it with mathematical code.
‘Its potential to revolutionise financial markets and society as a whole is too great for it to be over based on a price crash.
‘In order to really understand it, you need to separate the “price” from the technology. Ryan Dinse and I had a conversation about this — what gives bitcoin and other cryptos their value — last week for New Money Investor readers.
‘We’ve been at pains to point out that the price action is secondary. Understand the bigger picture first. Understand what it is that contributes to their value and the price action becomes easier to understand.’
REVEALED: What’s Next for Aussie Gold Stock Prices? Learn more.
Don’t forget you still have time to sign up for our latest service that Greg mentions called New Money Investor.
If the world of crypto doesn’t make sense to you, then we have everything you need to know here.
2) What’s going on in iron ore? The price has dropped down well under US$200 a tonne now.
The Chinese authorities are certainly doing everything they can to jawbone what they call ‘excessive speculation’.
The price is now down more than 20% from the record high it hit recently.
However, it’s not clear that excessive speculation was responsible for the price rise in the first place.
Aggregate volume in Chinese futures for steel and iron ore are way off record highs, according to industry analyst Robert Rennie.
World steel demand is strong. It was up 23% in April 2021.
While there’s no doubt that iron ore is under some short-term pressure, it still remains a very profitable and interesting sector.
For example, Fortescue Metals Group Ltd [ASX:FMG] is currently the best yield stock on the Aussie market. The dividend yield is more than 10% if it does nothing but hold last year’s level.
It will likely be better than last year. Fortescue (and Rio) may even pay a special dividend because the going has been so good lately.
But can you trust the iron ore price not to collapse on you? I think you can, at least as of now.
There is only so far and for so long that Chinese authorities can talk down the price. If steel demand remains this strong, then the price should hold above US$150.
Such an outcome would leave the big players BHP, Rio Tinto, and Fortescue as very profitable operators. It could also see them rerate sometime this year.
Most of the investment banks had iron ore pegged under US$150 for FY22.
Granted, that outcome may still come about.
But if iron ore can hold then you have some very nice dividend yields and modest earning multiples on the big miners. That should support their prices over the medium term.
I’m not saying they’re a buy today, but this dynamic bears close watching. Stay tuned for opportunity here.
Regards,
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Callum Newman,
Editor, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.
