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  • What’s Next for Cryptocurrencies and Digital Assets, Post-2020s Recession

    The macroeconomic outlook for the cryptocurrency/digital asset market is definitely not looking good, at this time. There are a multitude of reasons. I think this is largely because Cryptocurrencies are considered “trendy” in financial services, however I’ve recently been asked for my take on specific Crypto’s (Bitcoin primarily) and what I’ve come to refer to as “Complex Crypto’s” (ETFs, other Exchange Traded Crypto Securities, Crypto IRA’s, etc.). Of course, at the center of this conversation is Cryptocurrency mining and trading. As most who follow this market even casually know, the two are intimately related.

    Standpoint on Cryptocurrency and Digital Assets Throughout the Recession

    Disclaimer: Pro-crypto enthusiasts will not be happy. This is how I’d put it, favorably. I see the cryptocurrency market, coming out of the recession – assuming it does – with entirely new technologies, marketing strategies, market dynamics, etc. To elaborate, let’s take what we can all agree to be true about the cryptocurrency fan base today, largely speaking. They’re a) not long-term strategists, b) very weak (or completely incoherent) when it comes to basic knowledge of financial markets and even more complex financial instruments, and c) the composition of cryptocurrency investors is not one you’d generally – or ever – consider “cash rich” compared to other investors (both individual and institutional).

    We’re looking at a market with the majority of participants being short-term, stubborn and perhaps unqualified thinkers, with little to no savings to boot. Market dynamics aside, Bitcoin has been religiously dropping for quite a while now. If conceptually it doesn’t make sense and the numbers aren’t there, investors are in deep trouble.

    Fast forward a few months. The Fed continues their ongoing strategy of “deflating the inflation” with historically “aggressive” rate hikes. The participants in the market described above would generally be considered high in terms of price elasticity. Meaning, their sensitivity to pricing changes is above average. In prices rise, they are more likely to sell quicker than someone who is more price inelastic, perhaps because they have a larger savings (as an example). On average, the same cryptocurrency enthusiasts who decided to invest in a Crypto ITF are the ones who will be forced to sell off their digital asset portfolio the quickest.

    When the average cryptocurrency enthusiast starts to get more and more burdened by everyday essentials, their digital wallet’s intrinsic value will diminish rapidly. Are you willing to struggle to pay rent to hold onto Bitcoin at the price you bought it? If you’re already a short-term thinker, the answer is more or less common sense. No. Nor are you willing to sell your house to maintain a bullish position on Bitcoin (if you’ll be in one of the unfortunate groups that lose their job in the recession).

    The Cryptocurrency Enthusiasts with Never-ending Dedication

    Cryptocurrency enthusiasts will undoubtably disagree with the short-term thinking narrative, but it’s respectfully backwards. There’s no other asset in financial markets you’ve analyzed as a better bet for the long-term. Really? Not the S&P 500 Index? US Treasuries that have never defaulted? If you’re looking for enhanced potential for extravagant short-term returns, cryptocurrency is an area for you. But that’s a complete contradiction to the long-term value proposition. There is none.

    Their last standing argument: Blockchain Technology. This is debated in part, but the general consensus among the Crypto community appears to be along the lines of, “Blockchain technology is considered a commodity and regulated by the CFTC that we simply cannot live without as a society. Therefore, Bitcoin will survive and prosper through any recession, since we have propriety technology that will revolutionize the world” [I’m paraphrasing]. This technology is by no means universally accepted in traditional financial markets. Bill Murray’s Ethereum wallet was recently infamously hacked. This will no doubt bolster the SEC’s position against institutionalizing digital assets.

    It’s relied on even less so by traditional financial investors. Let’s not forget, the SEC is still unwilling to budge on a Bitcoin spot ETF with the number one concern being lack of technological innovation to eliminate jacking and market manipulation. If the SEC says it’s too dangerous, where do you think institutional investors will fall with the current macroeconomic trajectory? Why is Bill Murray’s Ethereum wallet suddenly the focus of all the daily financial newsletters?

    Near and Long-Term Cryptocurrency and Digital Assets Outlook

    In the near term (3-4 months), look for prices to continue dropping steadily. This goes across the board for all digital assets. In the long term (1.5-2+ years), that becomes a very complicated question when you dig into potential hypotheticals. Digital assets and cryptocurrencies are almost completely unregulated. There are no remotely serious regulatory requirements or disclosures of any information about holdings reports, portfolio allocation, investor reports, or any other typically standard financial accounting. That was part of the initial pitch: anonymity.

    Now, when purely digital asset portfolio managers like Grayscale want to get through to institutional investors, they start to create SEC approved Bitcoin Trusts, strategically push for Bitcoin spot ETFs, make it publicly known they own roughly 4% of all of Bitcoin, etc. That goes back to an original point. Bitcoin and cryptocurrencies may not get completely cratered like the dinosaurs did, but will we have thousands – or tens of thousands – of different cryptocurrencies, trading on infinite different platforms, with an unlimited amount of different marketed benefits? I don’t see it.

    Are Cryptocurrencies and Digital Assets Going to Crash from the Recession?

    To the more interesting question, can digital assets become the modern-day dinosaurs? It’s vaguely possible, but unlikely. This is where global politics, luck, and irrational/unconventional investor behavior tend to make the largest impacts. Let’s say Bitcoin drops below $5,000 and Grayscale, owning roughly 4%, assesses a further drop to $3,000 by next month. What does Grayscale do? Every financial product they sell is a digital asset and they’ve marketed Bitcoin as the obvious face. They get absolutely no protections from bankruptcy and neither do their investors. Yet, with the amount of Bitcoin they own, could they theoretically have backdoor discussions that would lead to the price of Bitcoin artificially being propped up? It’s a definite theoretical possibility.

    Again, we don’t know who Grayscale would be in the room and how much bargaining power they’d have. To the cryptocurrency enthusiasts who think it’s “cool” to invest in cryptocurrencies specifically because executives at traditional investment institutions are known for appeasing shareholders (in other words, doing their jobs) and “throwing investors under the bus”, well what do you think will happen to you? Will the CEO responsible for making those decisions that has the potential to change investors lives do the “ethical” thing because they don’t have shareholders to protect? I think the fair and impartial response is that remains to be seen. That’s the truth.

    Let’s face it: cryptocurrencies and digital assets are in for the fight for their existence. This is newfound territory for this comparatively new market. It will absolutely shed so much more light than we have today about investors true perspectives and feelings on digital assets. At the end of the day, in a world where quantitative data leads investment decisions, rather than personal belief and alleged loyalty, we’ll have to see what executives and cryptocurrency holders alike do on a broad scale.

    The Bottom Line and What to Do

    The “correct” decision – meaning the decision statistically likely to have the most favorable outcome – would be to reinvest your holdings elsewhere. The risk is way too big, while the reward is way too small or nonexistent. Of the at-risk assets on the chopping block, digital assets are first in line. There is no remotely likely scenario where cryptocurrency supporters get to say “I told you so” anytime soon.

    In reality, what you do is listen to the experts, at least in this case. No one’s saying you need to get your IRA, or any other investment vehicle out for that matter, but you can’t think of a more prudent investment given the economic climate you’re being explained? What about real estate? You have the benefit of a physical asset, upside to earn capital gains if market prices increase, and at the simplest level, housing is essential. Individuals will never not need housing. If the recession impact results in a catastrophic scenario, you have an asset with no real danger of going to zero.

    If you’re going to hunker down and stay invested in digital assets until the end, you can still diversify and reduce your exposure. There are Bitcoin futures ETFs, like the VanEck Bitcoin Strategy ETF we discussed last time. There is the SEC-backed Bitcoin Trust; Grayscale’s GBTC. You can invest in hard currencies that would offset your exposure to digital currencies.

    There’s a plethora of options of the astute investor, but the question in my mind continues to be, why? Why go through an agonizing recession, where you’ll make difficult financial choices just to maintain your current cryptocurrency holdings? Again, if you’re so over-the-top for Blockchain technology, it will be available for purchase at a lower price in the future. But the near future? No chances from the present. Bitcoin will continue to systematically drop daily until there is major turnaround. There’s no telling what that will look like yet.

    The Warren Buffett Philosophy

    Consider this quote from Warren Buffett and how it applies to this debate. Buffett is universally known as the most intelligent and disciplined value-based investor of our generation.

    “People should only [make investments] in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth.”

    -Warren Buffett, Unpublished

    Does the cryptocurrency market currently a) exhibit solid fundamentals, b) has strong earnings power, or c) has a solid potential for future growth? The answer to all three is no. That’s likely why Buffet has always remained a staunch opponent to digital assets. Buffet’s average holdings are somewhere from 10-34 years. It’s more than fair to say he views investing as a marathon, not a race.

    Concisely, as all other major financial news agree, the cryptocurrency market is at a crucial testing point, at bare minimum. We know crypto products aren’t going to gain market value during a recession, for sure. However, the extent of the damages digital assets will take compared to other “at-risk” assets remains to be seen. Time, Forbes, CNBC, and Reuters all predicted major cryptocurrency market tumbles during the recession just this week. Again, a lot of it will depend on luck and how things play out, but there are actions you can take as an investor to mitigate your exposure to the bullish side of the crypto/digital asset market during a recession.

    I’ll end with one final argument against cryptocurrencies and digital assets. Ironically, this goes against Warren Buffett’s main investing principle (at least in part). I believe he’s said that during a recession, his investment philosophy changes, but I was unable to find that quote.

    “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

    -Warren Buffett, Unpublished

    The Secret Behind Buffett’s Legacy: Some Deals are Simply too Risky

    Whether you agree with the risks to digital assets now or not, Buffett is spot on as usual. He has more famous quotes regarding investing in the stock market for the long-term, which is what he starts with. Buffett has held AXP (American Express) since 1964, KO (Coca-Cola) since 1988, and Wells Fargo (WFC) since 1989. Buffett’s outlook on the stock market is almost exclusively dependent on his analysis of that specific business. He’ll look at the financials in extensive detail, but he’ll also study the business model. How the company generates profits, what kinds of costs they incur. He’s the third richest person in the world off investments alone. Warren Buffett – rather than major investment banks or cash lenders – is known to have plenty of available cash during a recession or financial panic.

    Why? He hedges anywhere he’s far too overexposed and to boot, he has a knack for taking good bets on massively successful companies. In the context of cryptocurrency and digital assets, are they going to withstand all those arduous times? WWI & WWII, Vietnam, the Great Depression, over a dozen recessions and financial panics, oil shocks, a fly epidemic, and a political catastrophe? That wasn’t just an ego-trip; Buffett lived through those eras and more so, he prospered through them. Very few, if any, can say the same. Buffett stays away from a certain level of risk, period. No matter what the potential or hypothetical reward is, Buffett doesn’t execute the deal unless it’s met his standards.

    In Conclusion…

    With the way Blockchain was initially pitched, then repurposed, and gained little traction since is worrisome to me. The bottom line is cryptocurrency and digital assets have nowhere to go but down during an impactful recession. What you should do, in full sincerity, depends almost exclusively on your investing goals and available capital. In common, everyday situations – for example purchasing an overpriced digital currency – you should still mitigate your losses.

    You don’t want to be taking a bigger loss because you were too stubborn to take a much smaller one initially. I believe we’ll wind up seeing a lot of cryptocurrency investors in that boat. At what point will they be willing to toss it in and accept this investment just didn’t work out? Will they get to that point? Time will tell. What’s certain is the magnitude the recession’s impact will have on the cryptocurrencies and digital assets markets.

  • What’s Next for Cryptocurrencies and Digital Assets, Post-2020s Recession

    The macroeconomic outlook for the cryptocurrency/digital asset market is definitely not looking good, at this time. There are a multitude of reasons. I think this is largely because Cryptocurrencies are considered “trendy” in financial services, however I’ve recently been asked for my take on specific Crypto’s (Bitcoin primarily) and what I’ve come to refer to as “Complex Crypto’s” (ETFs, other Exchange Traded Crypto Securities, Crypto IRA’s, etc.). Of course, at the center of this conversation is Cryptocurrency mining and trading. As most who follow this market even casually know, the two are intimately related.

    Standpoint on Cryptocurrency and Digital Assets Throughout the Recession

    Disclaimer: Pro-crypto enthusiasts will not be happy. This is how I’d put it, favorably. I see the cryptocurrency market, coming out of the recession – assuming it does – with entirely new technologies, marketing strategies, market dynamics, etc. To elaborate, let’s take what we can all agree to be true about the cryptocurrency fan base today, largely speaking. They’re a) not long-term strategists, b) very weak (or completely incoherent) when it comes to basic knowledge of financial markets and even more complex financial instruments, and c) the composition of cryptocurrency investors is not one you’d generally – or ever – consider “cash rich” compared to other investors (both individual and institutional).

    We’re looking at a market with the majority of participants being short-term, stubborn and perhaps unqualified thinkers, with little to no savings to boot. Market dynamics aside, Bitcoin has been religiously dropping for quite a while now. If conceptually it doesn’t make sense and the numbers aren’t there, investors are in deep trouble.

    Fast forward a few months. The Fed continues their ongoing strategy of “deflating the inflation” with historically “aggressive” rate hikes. The participants in the market described above would generally be considered high in terms of price elasticity. Meaning, their sensitivity to pricing changes is above average. In prices rise, they are more likely to sell quicker than someone who is more price inelastic, perhaps because they have a larger savings (as an example). On average, the same cryptocurrency enthusiasts who decided to invest in a Crypto ITF are the ones who will be forced to sell off their digital asset portfolio the quickest.

    When the average cryptocurrency enthusiast starts to get more and more burdened by everyday essentials, their digital wallet’s intrinsic value will diminish rapidly. Are you willing to struggle to pay rent to hold onto Bitcoin at the price you bought it? If you’re already a short-term thinker, the answer is more or less common sense. No. Nor are you willing to sell your house to maintain a bullish position on Bitcoin (if you’ll be in one of the unfortunate groups that lose their job in the recession).

    The Cryptocurrency Enthusiasts with Never-ending Dedication

    Cryptocurrency enthusiasts will undoubtably disagree with the short-term thinking narrative, but it’s respectfully backwards. There’s no other asset in financial markets you’ve analyzed as a better bet for the long-term. Really? Not the S&P 500 Index? US Treasuries that have never defaulted? If you’re looking for enhanced potential for extravagant short-term returns, cryptocurrency is an area for you. But that’s a complete contradiction to the long-term value proposition. There is none.

    Their last standing argument: Blockchain Technology. This is debated in part, but the general consensus among the Crypto community appears to be along the lines of, “Blockchain technology is considered a commodity and regulated by the CFTC that we simply cannot live without as a society. Therefore, Bitcoin will survive and prosper through any recession, since we have propriety technology that will revolutionize the world” [I’m paraphrasing]. This technology is by no means universally accepted in traditional financial markets. Bill Murray’s Ethereum wallet was recently infamously hacked. This will no doubt bolster the SEC’s position against institutionalizing digital assets.

    It’s relied on even less so by traditional financial investors. Let’s not forget, the SEC is still unwilling to budge on a Bitcoin spot ETF with the number one concern being lack of technological innovation to eliminate jacking and market manipulation. If the SEC says it’s too dangerous, where do you think institutional investors will fall with the current macroeconomic trajectory? Why is Bill Murray’s Ethereum wallet suddenly the focus of all the daily financial newsletters?

    Near and Long-Term Cryptocurrency and Digital Assets Outlook

    In the near term (3-4 months), look for prices to continue dropping steadily. This goes across the board for all digital assets. In the long term (1.5-2+ years), that becomes a very complicated question when you dig into potential hypotheticals. Digital assets and cryptocurrencies are almost completely unregulated. There are no remotely serious regulatory requirements or disclosures of any information about holdings reports, portfolio allocation, investor reports, or any other typically standard financial accounting. That was part of the initial pitch: anonymity.

    Now, when purely digital asset portfolio managers like Grayscale want to get through to institutional investors, they start to create SEC approved Bitcoin Trusts, strategically push for Bitcoin spot ETFs, make it publicly known they own roughly 4% of all of Bitcoin, etc. That goes back to an original point. Bitcoin and cryptocurrencies may not get completely cratered like the dinosaurs did, but will we have thousands – or tens of thousands – of different cryptocurrencies, trading on infinite different platforms, with an unlimited amount of different marketed benefits? I don’t see it.

    Are Cryptocurrencies and Digital Assets Going to Crash from the Recession?

    To the more interesting question, can digital assets become the modern-day dinosaurs? It’s vaguely possible, but unlikely. This is where global politics, luck, and irrational/unconventional investor behavior tend to make the largest impacts. Let’s say Bitcoin drops below $5,000 and Grayscale, owning roughly 4%, assesses a further drop to $3,000 by next month. What does Grayscale do? Every financial product they sell is a digital asset and they’ve marketed Bitcoin as the obvious face. They get absolutely no protections from bankruptcy and neither do their investors. Yet, with the amount of Bitcoin they own, could they theoretically have backdoor discussions that would lead to the price of Bitcoin artificially being propped up? It’s a definite theoretical possibility.

    Again, we don’t know who Grayscale would be in the room and how much bargaining power they’d have. To the cryptocurrency enthusiasts who think it’s “cool” to invest in cryptocurrencies specifically because executives at traditional investment institutions are known for appeasing shareholders (in other words, doing their jobs) and “throwing investors under the bus”, well what do you think will happen to you? Will the CEO responsible for making those decisions that has the potential to change investors lives do the “ethical” thing because they don’t have shareholders to protect? I think the fair and impartial response is that remains to be seen. That’s the truth.

    Let’s face it: cryptocurrencies and digital assets are in for the fight for their existence. This is newfound territory for this comparatively new market. It will absolutely shed so much more light than we have today about investors true perspectives and feelings on digital assets. At the end of the day, in a world where quantitative data leads investment decisions, rather than personal belief and alleged loyalty, we’ll have to see what executives and cryptocurrency holders alike do on a broad scale.

    The Bottom Line and What to Do

    The “correct” decision – meaning the decision statistically likely to have the most favorable outcome – would be to reinvest your holdings elsewhere. The risk is way too big, while the reward is way too small or nonexistent. Of the at-risk assets on the chopping block, digital assets are first in line. There is no remotely likely scenario where cryptocurrency supporters get to say “I told you so” anytime soon.

    In reality, what you do is listen to the experts, at least in this case. No one’s saying you need to get your IRA, or any other investment vehicle out for that matter, but you can’t think of a more prudent investment given the economic climate you’re being explained? What about real estate? You have the benefit of a physical asset, upside to earn capital gains if market prices increase, and at the simplest level, housing is essential. Individuals will never not need housing. If the recession impact results in a catastrophic scenario, you have an asset with no real danger of going to zero.

    If you’re going to hunker down and stay invested in digital assets until the end, you can still diversify and reduce your exposure. There are Bitcoin futures ETFs, like the VanEck Bitcoin Strategy ETF we discussed last time. There is the SEC-backed Bitcoin Trust; Grayscale’s GBTC. You can invest in hard currencies that would offset your exposure to digital currencies.

    There’s a plethora of options of the astute investor, but the question in my mind continues to be, why? Why go through an agonizing recession, where you’ll make difficult financial choices just to maintain your current cryptocurrency holdings? Again, if you’re so over-the-top for Blockchain technology, it will be available for purchase at a lower price in the future. But the near future? No chances from the present. Bitcoin will continue to systematically drop daily until there is major turnaround. There’s no telling what that will look like yet.

    The Warren Buffett Philosophy

    Consider this quote from Warren Buffett and how it applies to this debate. Buffett is universally known as the most intelligent and disciplined value-based investor of our generation.

    “People should only [make investments] in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth.”

    -Warren Buffett, Unpublished

    Does the cryptocurrency market currently a) exhibit solid fundamentals, b) has strong earnings power, or c) has a solid potential for future growth? The answer to all three is no. That’s likely why Buffet has always remained a staunch opponent to digital assets. Buffet’s average holdings are somewhere from 10-34 years. It’s more than fair to say he views investing as a marathon, not a race.

    Concisely, as all other major financial news agree, the cryptocurrency market is at a crucial testing point, at bare minimum. We know crypto products aren’t going to gain market value during a recession, for sure. However, the extent of the damages digital assets will take compared to other “at-risk” assets remains to be seen. Time, Forbes, CNBC, and Reuters all predicted major cryptocurrency market tumbles during the recession just this week. Again, a lot of it will depend on luck and how things play out, but there are actions you can take as an investor to mitigate your exposure to the bullish side of the crypto/digital asset market during a recession.

    I’ll end with one final argument against cryptocurrencies and digital assets. Ironically, this goes against Warren Buffett’s main investing principle (at least in part). I believe he’s said that during a recession, his investment philosophy changes, but I was unable to find that quote.

    “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

    -Warren Buffett, Unpublished

    The Secret Behind Buffett’s Legacy: Some Deals are Simply too Risky

    Whether you agree with the risks to digital assets now or not, Buffett is spot on as usual. He has more famous quotes regarding investing in the stock market for the long-term, which is what he starts with. Buffett has held AXP (American Express) since 1964, KO (Coca-Cola) since 1988, and Wells Fargo (WFC) since 1989. Buffett’s outlook on the stock market is almost exclusively dependent on his analysis of that specific business. He’ll look at the financials in extensive detail, but he’ll also study the business model. How the company generates profits, what kinds of costs they incur. He’s the third richest person in the world off investments alone. Warren Buffett – rather than major investment banks or cash lenders – is known to have plenty of available cash during a recession or financial panic.

    Why? He hedges anywhere he’s far too overexposed and to boot, he has a knack for taking good bets on massively successful companies. In the context of cryptocurrency and digital assets, are they going to withstand all those arduous times? WWI & WWII, Vietnam, the Great Depression, over a dozen recessions and financial panics, oil shocks, a fly epidemic, and a political catastrophe? That wasn’t just an ego-trip; Buffett lived through those eras and more so, he prospered through them. Very few, if any, can say the same. Buffett stays away from a certain level of risk, period. No matter what the potential or hypothetical reward is, Buffett doesn’t execute the deal unless it’s met his standards.

    In Conclusion…

    With the way Blockchain was initially pitched, then repurposed, and gained little traction since is worrisome to me. The bottom line is cryptocurrency and digital assets have nowhere to go but down during an impactful recession. What you should do, in full sincerity, depends almost exclusively on your investing goals and available capital. In common, everyday situations – for example purchasing an overpriced digital currency – you should still mitigate your losses.

    You don’t want to be taking a bigger loss because you were too stubborn to take a much smaller one initially. I believe we’ll wind up seeing a lot of cryptocurrency investors in that boat. At what point will they be willing to toss it in and accept this investment just didn’t work out? Will they get to that point? Time will tell. What’s certain is the magnitude the recession’s impact will have on the cryptocurrencies and digital assets markets.

  • Why the SEC will Ultimately Deny VanEck’s Third Application for a Bitcoin Spot ETF and What it Means for Digital Assets

    Late last month, August 2022, the SEC announced a 45-day delay to rule on VanEck’s third Bitcoin Spot ETF application. This comes on the heels of the SEC denying Grayscale’s GBTC – an SEC backed Bitcoin Trust – conversion to a spot ETF, as well as Bitwise Asset Management’s application for a spot ETF, on the same day in late June 2022. VanEck currently has an SEC-backed Bitcoin futures ETF, the “VanEck Bitcoin Strategy ETF” (Cboe: XBTF). Their two previous applications for a Bitcoin spot ETF were rejected first in 2017, then late in 2021. VanEck is considered somewhat of an “investment giant”, with roughly $65B currently in AUM.

    Grayscale, with roughly $20M in AUM and a digital asset manager giant themselves, a subsidiary of Digital Currency Group (DCG) – who’s also the parent company of CoinDesk – sued the SEC immediately after they rejected the GBTC’s conversion from a SEC-backed Bitcoin Trust to a SEC-backed spot ETF. A ruling from a Federal Appellate Court is expected sometime in Q4 2023 or Q1 2024.

    Why Will the SEC Reject VanEck’s Application for a Bitcoin Spot ETF a Third Time?

    A better way to phrase the question is: why wouldn’t they? Has anything dramatically changed about either the SEC’s mandates, Bitcoin, market conditions, or is VanEck’s application unique? No, for all the above. VanEck’s Bitcoin spot ETF, which they’ve proposed to list on the Cboe BZX Exchange, would still create direct Bitcoin ownership for investors who purchased it. In my opinion, the SEC’s had to issue a 45-day delay because VanEck’s argument appears to differ from Grayscale’s. VanEck isn’t relying on a futures versus spot Exchanged Traded Fund [ETF] derivative comparison. Rather, they’re urging the SEC to reconsider because investors can access Bitcoin spot ETFs through our neighbors in Canada.

    They’re not wrong. As early as February 2021, Canada became one of the first countries in the world to place a Bitcoin spot ETF on one of their national exchanges. But given that was back in February 2021, the question remains: what’s changed? It’s completely unrealistic for the SEC to admit they weren’t aware of a Bitcoin spot ETF on a Canadian exchange. Hypothetically, it would very likely give Grayscale the green light to pursue further, more substantial legal action against the SEC.

    At the time Grayscale’s GBTC was rejected, many analysts cited the heightened potential for fraud and malpractice amongst digital assets being a key reason institutional investors, who generally purchase far more spot products than futures derivatives (as part of their traditional investment strategies), should not get access to an SEC-backed Bitcoin spot ETF yet. They said digital currency exchanges needed total transparency inside their marketplaces, like the DOW and NASDAQ. While this flies in the face of many reasons investors purchase digital assets and it’s not practical, it didn’t matter. That’s what the institutional investor community who was with the SEC just two months back demanded. VanEck is not purely a digital asset manager like Grayscale and in terms of AUM, they’re over 3 times larger.

    As another interesting reference point VanEck currently has 3 CO (Commodity) ETFs. The first is XBFT (Bitcoin Strategy ETF) and the second is OUNZ (VanEck Merk Gold ETF). XBFT has $19.2M in total net assets, while OUNZ has $600.4M. Interestingly, VanEck offers 65 EFT products and only 3 fall in the Commodities Asset Class. The other 62 are split between Fixed Income (Corporate, International, & Municipal Bonds, Rates products, etc.) and Equity ETFs. VanEck’s GDX has $9.4B in total net assets, while their ITM has 1,939 holdings (September 2, 2022). The XBFT has just $19.2M in total net assets and only 8 people holding it (September 2, 2022). Of the roughly $65B VanEck has in AUM, XBFT – a Bitcoin futures ETF – represents around .002% of their investment portfolio.

    Concisely, VanEck is a bigger, more established firm that has broader appeal to institutional investors already compared to Grayscale, who owns roughly 3.5% of all of Bitcoin and is purely a digital asset manager. They have the first SEC-approved Bitcoin Trust ETF with GBTC, trading on the NASDAQ. They are doing their best to bring digital assets to institutional investors. That’s why they’ve gone all out for a Bitcoin spot ETF, whereas VanEck seems to have strategically made a push when they’ve felt they had a compelling case.

    Does the SEC’s 45-Delay Mean VanEck has a Real Chance?

    I believe it means they have a better chance, but will ultimately suffer the same fate as Grayscale and Bitwise. I don’t even think it gives them much of a better chance; only if the SEC makes an unexpected blunder. Nothing has changed about their concerns related to GBTC that would warrant VanEck’s application to get approved.

    “The Commission [SEC] finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change and the issues raised therein.”
    -SEC Spokesperson, in a letter to VanEck (August 2022)
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    The verbiage in this quote seems to be hinting that the SEC is actually considering accepting VanEck’s argument. However, the SEC issuing a delay on a ruling isn’t exactly breaking news. They’ve shot down over a dozen attempts at a Bitcoin spot ETF in the last 12-month calendar year alone. There is no new information to indicate Bitcoin is any less susceptible to fraud – thereby posting inherent investor risk – than two months ago. The SEC is buying time in hopes of making a more compelling case regarding Bitcoin spot ETF’s in Canadian markets. What’s going to make more headlines in 45 days, the macroeconomic conditions from rising rates, inflation, and other recessionary indicators, or the SEC rejected the 15th (or so) Bitcoin spot ETF in the last year? After all, the SEC isn’t completely unaware of the current dynamics in financial markets.

    If VanEck is Ultimately Denied, What Does that Mean for Cryptocurrency?

    The overall impact is unlikely to be large, unless the SEC gets unpredictable here. Assuming they stay consistent with their rationale, this matter will go back to the DC Appellate Courts. But if you’re an institutional investor of SEC-approved Bitcoin assets, you’re not going to be majorly impacted by this. Inflation and rising interest rates? That will likely negatively impact at risk assets across the board and digital assets are certainly in that category. But the long-term ramifications for Bitcoin from this latest SEC ruling are likely to be very minimal.

    Just to end with a key point we just touched on, watch out for at risk assets considering this is very likely going to be the realest felt recession since 2008. There won’t be a major economic downturn because we’ve learned our lessons from 2008, but investors will sell off at-risk assets as soon as financial markets show signs of destabilization. Digital assets in an investor’s portfolio will be one of the first to go. Combined with the seasonality of Bitcoin slumps, expect the price to drop below 15,000 and who knows how much lower. How much lower would it take for the strongest crypto asset enthusiasts to wave the red flag? Would that ever happen? Only time will tell, but again, considering we have a lot of indications a recession is coming, taking a bullish position on Bitcoin in the short-term is unwise at best.

  • Why the SEC will Ultimately Deny VanEck’s Third Application for a Bitcoin Spot ETF and What it Means for Digital Assets

    Late last month, August 2022, the SEC announced a 45-day delay to rule on VanEck’s third Bitcoin Spot ETF application. This comes on the heels of the SEC denying Grayscale’s GBTC – an SEC backed Bitcoin Trust – conversion to a spot ETF, as well as Bitwise Asset Management’s application for a spot ETF, on the same day in late June 2022. VanEck currently has an SEC-backed Bitcoin futures ETF, the “VanEck Bitcoin Strategy ETF” (Cboe: XBTF). Their two previous applications for a Bitcoin spot ETF were rejected first in 2017, then late in 2021. VanEck is considered somewhat of an “investment giant”, with roughly $65B currently in AUM.

    Grayscale, with roughly $20M in AUM and a digital asset manager giant themselves, a subsidiary of Digital Currency Group (DCG) – who’s also the parent company of CoinDesk – sued the SEC immediately after they rejected the GBTC’s conversion from a SEC-backed Bitcoin Trust to a SEC-backed spot ETF. A ruling from a Federal Appellate Court is expected sometime in Q4 2023 or Q1 2024.

    Why Will the SEC Reject VanEck’s Application for a Bitcoin Spot ETF a Third Time?

    A better way to phrase the question is: why wouldn’t they? Has anything dramatically changed about either the SEC’s mandates, Bitcoin, market conditions, or is VanEck’s application unique? No, for all the above. VanEck’s Bitcoin spot ETF, which they’ve proposed to list on the Cboe BZX Exchange, would still create direct Bitcoin ownership for investors who purchased it. In my opinion, the SEC’s had to issue a 45-day delay because VanEck’s argument appears to differ from Grayscale’s. VanEck isn’t relying on a futures versus spot Exchanged Traded Fund [ETF] derivative comparison. Rather, they’re urging the SEC to reconsider because investors can access Bitcoin spot ETFs through our neighbors in Canada.

    They’re not wrong. As early as February 2021, Canada became one of the first countries in the world to place a Bitcoin spot ETF on one of their national exchanges. But given that was back in February 2021, the question remains: what’s changed? It’s completely unrealistic for the SEC to admit they weren’t aware of a Bitcoin spot ETF on a Canadian exchange. Hypothetically, it would very likely give Grayscale the green light to pursue further, more substantial legal action against the SEC.

    At the time Grayscale’s GBTC was rejected, many analysts cited the heightened potential for fraud and malpractice amongst digital assets being a key reason institutional investors, who generally purchase far more spot products than futures derivatives (as part of their traditional investment strategies), should not get access to an SEC-backed Bitcoin spot ETF yet. They said digital currency exchanges needed total transparency inside their marketplaces, like the DOW and NASDAQ. While this flies in the face of many reasons investors purchase digital assets and it’s not practical, it didn’t matter. That’s what the institutional investor community who was with the SEC just two months back demanded. VanEck is not purely a digital asset manager like Grayscale and in terms of AUM, they’re over 3 times larger.

    As another interesting reference point VanEck currently has 3 CO (Commodity) ETFs. The first is XBFT (Bitcoin Strategy ETF) and the second is OUNZ (VanEck Merk Gold ETF). XBFT has $19.2M in total net assets, while OUNZ has $600.4M. Interestingly, VanEck offers 65 EFT products and only 3 fall in the Commodities Asset Class. The other 62 are split between Fixed Income (Corporate, International, & Municipal Bonds, Rates products, etc.) and Equity ETFs. VanEck’s GDX has $9.4B in total net assets, while their ITM has 1,939 holdings (September 2, 2022). The XBFT has just $19.2M in total net assets and only 8 people holding it (September 2, 2022). Of the roughly $65B VanEck has in AUM, XBFT – a Bitcoin futures ETF – represents around .002% of their investment portfolio.

    Concisely, VanEck is a bigger, more established firm that has broader appeal to institutional investors already compared to Grayscale, who owns roughly 3.5% of all of Bitcoin and is purely a digital asset manager. They have the first SEC-approved Bitcoin Trust ETF with GBTC, trading on the NASDAQ. They are doing their best to bring digital assets to institutional investors. That’s why they’ve gone all out for a Bitcoin spot ETF, whereas VanEck seems to have strategically made a push when they’ve felt they had a compelling case.

    Does the SEC’s 45-Delay Mean VanEck has a Real Chance?

    I believe it means they have a better chance, but will ultimately suffer the same fate as Grayscale and Bitwise. I don’t even think it gives them much of a better chance; only if the SEC makes an unexpected blunder. Nothing has changed about their concerns related to GBTC that would warrant VanEck’s application to get approved.

    “The Commission [SEC] finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change and the issues raised therein.”
    -SEC Spokesperson, in a letter to VanEck (August 2022)
    Tweet

    The verbiage in this quote seems to be hinting that the SEC is actually considering accepting VanEck’s argument. However, the SEC issuing a delay on a ruling isn’t exactly breaking news. They’ve shot down over a dozen attempts at a Bitcoin spot ETF in the last 12-month calendar year alone. There is no new information to indicate Bitcoin is any less susceptible to fraud – thereby posting inherent investor risk – than two months ago. The SEC is buying time in hopes of making a more compelling case regarding Bitcoin spot ETF’s in Canadian markets. What’s going to make more headlines in 45 days, the macroeconomic conditions from rising rates, inflation, and other recessionary indicators, or the SEC rejected the 15th (or so) Bitcoin spot ETF in the last year? After all, the SEC isn’t completely unaware of the current dynamics in financial markets.

    If VanEck is Ultimately Denied, What Does that Mean for Cryptocurrency?

    The overall impact is unlikely to be large, unless the SEC gets unpredictable here. Assuming they stay consistent with their rationale, this matter will go back to the DC Appellate Courts. But if you’re an institutional investor of SEC-approved Bitcoin assets, you’re not going to be majorly impacted by this. Inflation and rising interest rates? That will likely negatively impact at risk assets across the board and digital assets are certainly in that category. But the long-term ramifications for Bitcoin from this latest SEC ruling are likely to be very minimal.

    Just to end with a key point we just touched on, watch out for at risk assets considering this is very likely going to be the realest felt recession since 2008. There won’t be a major economic downturn because we’ve learned our lessons from 2008, but investors will sell off at-risk assets as soon as financial markets show signs of destabilization. Digital assets in an investor’s portfolio will be one of the first to go. Combined with the seasonality of Bitcoin slumps, expect the price to drop below 15,000 and who knows how much lower. How much lower would it take for the strongest crypto asset enthusiasts to wave the red flag? Would that ever happen? Only time will tell, but again, considering we have a lot of indications a recession is coming, taking a bullish position on Bitcoin in the short-term is unwise at best.

  • Is India’s UPI (Unified Payments Interface) Technology Worth Selling Overseas and to Western Countries?

    The Unified Payments Interface (UPI) was created by the National Payments Corporation of India (NPCI) for purposes of “enabling digital payments and settlement systems in India, is an initiative of RBI and IBA”. As announced in Bloomberg in June 2022, the NPCI is looking to take UPI to overseas markets. This implies that a) the technology has been tested thoroughly and successfully in Indian markets and b) there is currently no real competitor to UPI in overseas markets. At one point, NPCI CEO Ritesh Shukla compared it to a “home-grown alternative to SWIFT”. For those who aren’t familiar, SWIFT is a Belgium-based cross-border payments system operator.

    Has the Product [UPI] been Thoroughly Tested in Indian Markets?

    Based on our research, yes UPI has been tested both rigorously and successfully in Indian markets.

    “We have displaced cash in India to a large extent and are now looking to repeat the success in cross-border corridors. Overseas Indians can use our rails to remit money inwards straightway into their bank accounts, and for the markets where Indians travel frequently, we will build acceptance for our instruments.”
    – NPCI CEO, Ritesh Shukla
    Tweet

    Not only has the technology behind UPI been proven and tested, but the methodology has also succeeded. At least that’s the quantitative claim Shukla’s making. The World Bank data seems to support the analysis too. Indians overseas remitted $87 billion in 2021; the biggest inflow for any country that was tracked by the World Bank.

    Under the RBI’s “Liberalized Remittance Scheme”, all resident individuals (including minors) are allowed to freely remit up to USD $250,000 per year. This is from April-March, for any permissible current or capital account transaction, or a combination of both. Further, resident individuals can avail of the foreign exchange facility, for specific purposes within the limit of USD $250,000 only. The RBI’s “Scheme” was introduced on February 4, 2004, with a limit of USD $25,000 (BusinessDesk, Bloomberg). Since then, the LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. Notably, the “Scheme” is not available to corporates, partnership firms, HUF, Trusts etc.

    Are there Any Notable Comparisons to India’s UPI Abroad (not factoring in SWIFT)?

    Of the $87 million in remittances India received in 2021, the US was the biggest source (World Bank). According to the World Bank, US remittances to India accounted for over 20% of the $87 million in 2021.

    “Flows to India (the world’s largest recipient of remittances) are expected to reach $87 billion, a gain of 4.6 per cent with the severity of COVID-19 caseloads and deaths during the second quarter (well above the global average) playing a prominent role in drawing altruistic flows (including for the purchase of oxygen tanks) to the country”.
    – World Bank Spokesperson, World Bank Migration and Development Brief, 2022
    Tweet

    In terms of total global remittances, India is followed by China, Mexico, the Philippines, and Egypt (World Bank). In India, remittances are projected to grow 3% in 2022 to $89.6 billion. This is reflective of a drop in overall migrant stock, as a large proportion of returnees from Middle Eastern countries are still awaiting return (World Bank).

    Remittances in low-and-middle-income countries are projected to have grown a strong 7.3% to reach $589 billion in 2021 (World Bank). This “return to growth” is far more robust than earlier estimates. Following the same resilience of flows in 2020, when remittances declined by only 1.7% despite a severe global recession due to COVID-19, according to estimates from the World Bank’s Migration and Development Brief. Lastly, the brief in its entirety can be found here, from the World Bank’s website.

    Outside of evaluating the micro-differences to SWIFT, there are no current notable competitors to India’s UPI we could find. Without any doubt, no possible comparisons would come close in terms of size or scale.

  • Is India’s UPI (Unified Payments Interface) Technology Worth Selling Overseas and to Western Countries?

    The Unified Payments Interface (UPI) was created by the National Payments Corporation of India (NPCI) for purposes of “enabling digital payments and settlement systems in India, is an initiative of RBI and IBA”. As announced in Bloomberg in June 2022, the NPCI is looking to take UPI to overseas markets. This implies that a) the technology has been tested thoroughly and successfully in Indian markets and b) there is currently no real competitor to UPI in overseas markets. At one point, NPCI CEO Ritesh Shukla compared it to a “home-grown alternative to SWIFT”. For those who aren’t familiar, SWIFT is a Belgium-based cross-border payments system operator.

    Has the Product [UPI] been Thoroughly Tested in Indian Markets?

    Based on our research, yes UPI has been tested both rigorously and successfully in Indian markets.

    “We have displaced cash in India to a large extent and are now looking to repeat the success in cross-border corridors. Overseas Indians can use our rails to remit money inwards straightway into their bank accounts, and for the markets where Indians travel frequently, we will build acceptance for our instruments.”
    – NPCI CEO, Ritesh Shukla
    Tweet

    Not only has the technology behind UPI been proven and tested, but the methodology has also succeeded. At least that’s the quantitative claim Shukla’s making. The World Bank data seems to support the analysis too. Indians overseas remitted $87 billion in 2021; the biggest inflow for any country that was tracked by the World Bank.

    Under the RBI’s “Liberalized Remittance Scheme”, all resident individuals (including minors) are allowed to freely remit up to USD $250,000 per year. This is from April-March, for any permissible current or capital account transaction, or a combination of both. Further, resident individuals can avail of the foreign exchange facility, for specific purposes within the limit of USD $250,000 only. The RBI’s “Scheme” was introduced on February 4, 2004, with a limit of USD $25,000 (BusinessDesk, Bloomberg). Since then, the LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. Notably, the “Scheme” is not available to corporates, partnership firms, HUF, Trusts etc.

    Are there Any Notable Comparisons to India’s UPI Abroad (not factoring in SWIFT)?

    Of the $87 million in remittances India received in 2021, the US was the biggest source (World Bank). According to the World Bank, US remittances to India accounted for over 20% of the $87 million in 2021.

    “Flows to India (the world’s largest recipient of remittances) are expected to reach $87 billion, a gain of 4.6 per cent with the severity of COVID-19 caseloads and deaths during the second quarter (well above the global average) playing a prominent role in drawing altruistic flows (including for the purchase of oxygen tanks) to the country”.
    – World Bank Spokesperson, World Bank Migration and Development Brief, 2022
    Tweet

    In terms of total global remittances, India is followed by China, Mexico, the Philippines, and Egypt (World Bank). In India, remittances are projected to grow 3% in 2022 to $89.6 billion. This is reflective of a drop in overall migrant stock, as a large proportion of returnees from Middle Eastern countries are still awaiting return (World Bank).

    Remittances in low-and-middle-income countries are projected to have grown a strong 7.3% to reach $589 billion in 2021 (World Bank). This “return to growth” is far more robust than earlier estimates. Following the same resilience of flows in 2020, when remittances declined by only 1.7% despite a severe global recession due to COVID-19, according to estimates from the World Bank’s Migration and Development Brief. Lastly, the brief in its entirety can be found here, from the World Bank’s website.

    Outside of evaluating the micro-differences to SWIFT, there are no current notable competitors to India’s UPI we could find. Without any doubt, no possible comparisons would come close in terms of size or scale.

  • The Three Different Property Categories in Real Estate Investing

    One of the more common myths about real estate investing is that for the average investor, it’s largely lopsided in the way potential investors view their options in the real estate market. While real estate is the world’s largest asset class, most novice investors, who make up the majority of the real estate investing class, largely favor investing in the residential real estate segment. In other words, they do not fully appreciate multiple real estate investment categories.

    “One of the questions that generally first arises is: Exactly what sorts of property can be invested in? Is real estate investment just about flipping houses?”

    – Topouzis & Associates, P.C., 2022

    No, it’s not. Real estate investment is about a lot more than merely “flipping houses”. Real estate investment, in today’s day and age, is about portfolio diversification, hedging risk, purchasing REITs, leasing several adjoined units and becoming the Airbnb property manager, etc. There are plenty of ways real estate investors can earn a positive ROI outside of “buying low, selling high”. Historically and still commonly today, real estate investing has been segregated into three primary categories.

    1. Residential Real Estate

    Flipping houses is undoubtedly considered to be under the residential real estate umbrella. However, there is far more to it than that. Other types of property included in this category are condos, townhouses, and free-standing homes (Topouzis & Associates, P.C., 2022). Fundamentally, this is where people want to live, rather than work. Here’s an undoubtably interesting fact for real estate investors. If you have a rental property extend beyond four units in size – which causes it to be considered apartments – at which point the property becomes classified as Commercial Real Estate (CRE).

    2. Commercial Real Estate (CRE)

    In essence, this is the type of property where businesses are located. These locations are generally in large metropolitan areas, or places where potential customers can frequent. Commercial Real Estate (CRE), up until COVID at bare minimum, has seen a rapid acceleration of investment. Furthermore, multifamily residential units that have 4 plus units are considered in the CRE sub-sector of real estate investing. When you factor in alternative, more complex ways investors get into the CRE market (PropTech, REIGs, REITs, etc.), you’ll notice there is a tremendous amount of room to make a profit.

    3. Industrial Real Estate

    This class of real estate can be described as the kind of property where industrial “behind the scenes” elements of business get done. These locations are usually not “open” to customers in the conventional sense. Though generally there’s no prohibition against the occasional customer visitation. This third and final category of real estate investment includes areas such as warehouses, plants, factories, and shipment facilities.

    It’s critical to understand that each category will have a different investing approach. As an example, at times the residential real estate market was doing well, the CRE market plummeted. Novice real estate investors are best starting off here, at the first point of understanding the three different categories. Which category do you want to invest in? Why? Have you thought about the alternatives? Make sure you not only understand what real estate class is for you, but make sure you review the broad array of financial instruments available in each of those categories.

  • Four Major Valuation Methods Explained: Commercial Real Estate (CRE)

    From the perspective of investors, coming up with an accurate property valuation is the most significant factor in making investment decisions. Commercial real estate (CRE) investment has become increasingly popular in the past few decades. That’s because it’s viewed as an excellent vehicle for corporate and public wealth investors to achieve stable returns.

    In this post, we’ll look at four primary valuation methods investors use when looking at CRE proposals. It should be no surprise that technology deeply impacts a potential CRE investment valuation. It’s truly astounding how powerful software solutions can support the consistency, transparency, and standardization across the valuation industry.

    Cost Approach

    The cost approach involves estimating a rough total budget for how much the structure would cost to build from scratch. The cost approach accounts for the original value of the land, plus the cost to build the structure from the ground up. Investors typically look at this approach to see if it’s financially more profitable to develop a new property, versus buying an existing one. The cost approach is comprised of two major methods:

    • Reproduction Method – Costs of rebuilding an exact replica of the existing structure, using the same materials, construction methods, etc.
    • Replacement Method – Costs of rebuilding a new structure with brand new materials, construction methods, designs, etc.

    This logic is generally sound. However, it’s critical to note this method does not account for additional effort of development and construction involved in building a property from the ground up. Similarly, it does not account for the long-term cash flow of a given CRE project.

    Sales Comparison Approach

    Comparisons between key market factors are one of the most important inputs to any valuation method. Furthermore, sales comparisons are usually the source of information, such as cost of reproduction, current market capitalization rate, loan-to-value ratios, and others (Atlus Group). Prospective buyers use this approach to compare current CRE listings to recently sold projects. Though this list isn’t exhaustive, it includes major components of the sales comparison approach:

    • Price per square foot
    • Capitalization rate
    • Price per unit (multifamily CRE)
    • Price per key (hospitality CRE)
    • Physical condition
    • Location
    • Tenant profiles (income, credit quality, cash flow stability, etc.)
    • Income (financial statements)

    The closer in similarity a prospective CRE property is to a comparable sale – especially a recent one – referencing the above components, the more effective this approach tends to be. Finally, once the quantitative characteristics of the perspective CRE property are compared, there is a qualitative analysis to ensure any more or less favorable attributes are accounted for. These adjustments are an essential precaution, if using this valuation method for CRE purchases.

    One notable downside to this method is a lack of analysis of any long-term cash flows or property valuation.

    Capitalization Rate Approach (Income Capitalization)

    The “cap rate” approach is one of the most popular methods of property valuation. It’s very frequently used by analysts in both the lending world and intended acquisitions (Atlus Group). When you hear real estate professionals mention what a property “traded at”, they’re almost always citing either the cap rate, or the price per square foot, a property sold for.

    The formula for calculating cap rate is simple. It’s equal to the net operating income (NOI) of the property, divided by the capitalization rate. The outcome represents the ownership’s approximate value of the property, based on the first year’s expected cash flow.

    Like the Sales Comparison Approach, this tool is most valuable to estimate the current value of CRE properties. Furthermore, it’s even more useful if the property has relatively stable and easily predictable cash flow. New, complex projects that have essentially zero NOI are not good candidates for this valuation approach. In such circumstances, investors are much more likely to turn to the Discounted Cash Flow Approach.

    Discounted Cash Flow Approach

    While the three previously detailed CRE valuation methods are undoubtably useful under certain conditions, they share a major drawback. Each of first three valuation methods estimate the value of a CRE property at a specific point in time. This is in fact a major drawback for real estate investors, who are rarely investing primarily for short-term gains.

    Suppose an example of a long-term, direct real estate investor, looking to maximize their return of a 10-year period. The below formula, taken from Investopedia shows the common formula for the Discounted Cash Flow (DCF) approach.

    Source: Sabrina Jiang, Investopedia (2021)

    Investors utilize this method to factor in both the delta of the initial buying price and the value of the property after ten years, in addition to the net present value (NPV) of any cash flows that come in from owning that property over 10 years. This gives real estate investors a great formula to input prognostications, then make transactions based on those forecasts.

    Reverting to the drawbacks of point-in-time valuations, firstly, it’s critical to understand fundamental psychology real estate investors utilize. Typically, real estate investors have a longer-term vision, especially compared to investors who purchase various securities. This makes a point-in-time valuation much less relevant, since in the long-run real estate investors are not just looking at an easily predictably present value. As we saw in 2008 most famously and during the COVID-19 pandemic most recently, real estate prices can tank from unrelated market activities, political changes, or even a completely unexpected global health pandemic (Altus Group).

    Conclusion

    Long-term volatility concerns necessitate real estate investors to rely on more than increases in value over time. This is a primary explanation why investors generally rely on the cash flow, plus a final value increase. If an investor holds a property for ten years from purchase to sale, as an example, the overall return will be a combination of cash flow from all ten years of ownership, plus any difference between the initial purchase price and the ultimate sale price.

    The cost, sales comparison, and capitalization rate approaches all fail to account for both potential changes in the cash flow, or value of the property, over the investment hold period. Hypothetically, if an investor knows that in year three of the hold period, a major tenant is going to vacate the property and cause a significant decrease in the property’s cash flow for the period, this clearly negatively impacts the overall return the investor attains. The only valuation method that takes into consideration time value of money and captures the future performance of the property is the DCF method.

    The DCF method predicts future cash flows over an estimated property hold period. This includes both annual cash flow and profit at the time of sale. Many practitioners found that attempting to accurately predict revenue, expenses, and the future value of the property at the time of sale, is actually quite difficult. It essentially forces them forces them to think deeply and more critically. Long-term risk factors, management, quality of tenants, and trends in the real estate market suddenly appear on their immediate radar.

    While not perfect (valuation models are not a crystal ball), the DCF method is generally preferred by real estate investors. Bluntly, the DCF approach best matches the reality of the investment, compared to the others discussed above.

    The Closing Argument to Real Estate Investors (Primarily CRE Investors)

    Selecting the best-fit valuation method is akin to choosing the right tool for a homeowner’s repair project. Most of the decision is decided on a case-by-case basis, based on the best information available. With the varying subjective methods and information, asset appraisal in the world of commercial is part formula, part art form.

    In practicality, most appraisers don’t limit themselves to one method, instead taking an average of two or more methods. It’s hardly surprising appraisers have toned down their aggressive approach, especially compared to nearly 15 years ago. After the catastrophic downward spiral of 2008, the more analysis real estate investment projects undergo, the better. To build on the methods discussed, a well-known method rapidly gaining increasing popularity is called the stress test. Perhaps this test is more commonly referenced in the investment banking sector, namely to monitor volatility ratios of aggressive investment banks who also hold client checking and other deposit accounts, to ensure we don’t need to worry about anymore “bank runs”, but nonetheless the same logic applies to the real estate sector and it’s played an indispensable component to accurate real estate valuations. 

    If you take nothing else away from this article, use the DCF Method whenever possible. Especially in today’s ever-changing real estate market, periodic cash flows are a must to have a successful, long-term real estate holding. As with any other investment, do your due diligence, ensure you have the right team around you, and take calculated, well-thought risks. Good luck to all continuing to navigate the post COVID-19 real estate landmine!

  • Four Major Valuation Methods Explained: Commercial Real Estate (CRE)

    From the perspective of investors, coming up with an accurate property valuation is the most significant factor in making investment decisions. Commercial real estate (CRE) investment has become increasingly popular in the past few decades. That’s because it’s viewed as an excellent vehicle for corporate and public wealth investors to achieve stable returns.

    In this post, we’ll look at four primary valuation methods investors use when looking at CRE proposals. It should be no surprise that technology deeply impacts a potential CRE investment valuation. It’s truly astounding how powerful software solutions can support the consistency, transparency, and standardization across the valuation industry.

    Cost Approach

    The cost approach involves estimating a rough total budget for how much the structure would cost to build from scratch. The cost approach accounts for the original value of the land, plus the cost to build the structure from the ground up. Investors typically look at this approach to see if it’s financially more profitable to develop a new property, versus buying an existing one. The cost approach is comprised of two major methods:

    • Reproduction Method – Costs of rebuilding an exact replica of the existing structure, using the same materials, construction methods, etc.
    • Replacement Method – Costs of rebuilding a new structure with brand new materials, construction methods, designs, etc.

    This logic is generally sound. However, it’s critical to note this method does not account for additional effort of development and construction involved in building a property from the ground up. Similarly, it does not account for the long-term cash flow of a given CRE project.

    Sales Comparison Approach

    Comparisons between key market factors are one of the most important inputs to any valuation method. Furthermore, sales comparisons are usually the source of information, such as cost of reproduction, current market capitalization rate, loan-to-value ratios, and others (Atlus Group). Prospective buyers use this approach to compare current CRE listings to recently sold projects. Though this list isn’t exhaustive, it includes major components of the sales comparison approach:

    • Price per square foot
    • Capitalization rate
    • Price per unit (multifamily CRE)
    • Price per key (hospitality CRE)
    • Physical condition
    • Location
    • Tenant profiles (income, credit quality, cash flow stability, etc.)
    • Income (financial statements)

    The closer in similarity a prospective CRE property is to a comparable sale – especially a recent one – referencing the above components, the more effective this approach tends to be. Finally, once the quantitative characteristics of the perspective CRE property are compared, there is a qualitative analysis to ensure any more or less favorable attributes are accounted for. These adjustments are an essential precaution, if using this valuation method for CRE purchases.

    One notable downside to this method is a lack of analysis of any long-term cash flows or property valuation.

    Capitalization Rate Approach (Income Capitalization)

    The “cap rate” approach is one of the most popular methods of property valuation. It’s very frequently used by analysts in both the lending world and intended acquisitions (Atlus Group). When you hear real estate professionals mention what a property “traded at”, they’re almost always citing either the cap rate, or the price per square foot, a property sold for.

    The formula for calculating cap rate is simple. It’s equal to the net operating income (NOI) of the property, divided by the capitalization rate. The outcome represents the ownership’s approximate value of the property, based on the first year’s expected cash flow.

    Like the Sales Comparison Approach, this tool is most valuable to estimate the current value of CRE properties. Furthermore, it’s even more useful if the property has relatively stable and easily predictable cash flow. New, complex projects that have essentially zero NOI are not good candidates for this valuation approach. In such circumstances, investors are much more likely to turn to the Discounted Cash Flow Approach.

    Discounted Cash Flow Approach

    While the three previously detailed CRE valuation methods are undoubtably useful under certain conditions, they share a major drawback. Each of first three valuation methods estimate the value of a CRE property at a specific point in time. This is in fact a major drawback for real estate investors, who are rarely investing primarily for short-term gains.

    Suppose an example of a long-term, direct real estate investor, looking to maximize their return of a 10-year period. The below formula, taken from Investopedia shows the common formula for the Discounted Cash Flow (DCF) approach.

    Source: Sabrina Jiang, Investopedia (2021)

    Investors utilize this method to factor in both the delta of the initial buying price and the value of the property after ten years, in addition to the net present value (NPV) of any cash flows that come in from owning that property over 10 years. This gives real estate investors a great formula to input prognostications, then make transactions based on those forecasts.

    Reverting to the drawbacks of point-in-time valuations, firstly, it’s critical to understand fundamental psychology real estate investors utilize. Typically, real estate investors have a longer-term vision, especially compared to investors who purchase various securities. This makes a point-in-time valuation much less relevant, since in the long-run real estate investors are not just looking at an easily predictably present value. As we saw in 2008 most famously and during the COVID-19 pandemic most recently, real estate prices can tank from unrelated market activities, political changes, or even a completely unexpected global health pandemic (Altus Group).

    Conclusion

    Long-term volatility concerns necessitate real estate investors to rely on more than increases in value over time. This is a primary explanation why investors generally rely on the cash flow, plus a final value increase. If an investor holds a property for ten years from purchase to sale, as an example, the overall return will be a combination of cash flow from all ten years of ownership, plus any difference between the initial purchase price and the ultimate sale price.

    The cost, sales comparison, and capitalization rate approaches all fail to account for both potential changes in the cash flow, or value of the property, over the investment hold period. Hypothetically, if an investor knows that in year three of the hold period, a major tenant is going to vacate the property and cause a significant decrease in the property’s cash flow for the period, this clearly negatively impacts the overall return the investor attains. The only valuation method that takes into consideration time value of money and captures the future performance of the property is the DCF method.

    The DCF method predicts future cash flows over an estimated property hold period. This includes both annual cash flow and profit at the time of sale. Many practitioners found that attempting to accurately predict revenue, expenses, and the future value of the property at the time of sale, is actually quite difficult. It essentially forces them forces them to think deeply and more critically. Long-term risk factors, management, quality of tenants, and trends in the real estate market suddenly appear on their immediate radar.

    While not perfect (valuation models are not a crystal ball), the DCF method is generally preferred by real estate investors. Bluntly, the DCF approach best matches the reality of the investment, compared to the others discussed above.

    The Closing Argument to Real Estate Investors (Primarily CRE Investors)

    Selecting the best-fit valuation method is akin to choosing the right tool for a homeowner’s repair project. Most of the decision is decided on a case-by-case basis, based on the best information available. With the varying subjective methods and information, asset appraisal in the world of commercial is part formula, part art form.

    In practicality, most appraisers don’t limit themselves to one method, instead taking an average of two or more methods. It’s hardly surprising appraisers have toned down their aggressive approach, especially compared to nearly 15 years ago. After the catastrophic downward spiral of 2008, the more analysis real estate investment projects undergo, the better. To build on the methods discussed, a well-known method rapidly gaining increasing popularity is called the stress test. Perhaps this test is more commonly referenced in the investment banking sector, namely to monitor volatility ratios of aggressive investment banks who also hold client checking and other deposit accounts, to ensure we don’t need to worry about anymore “bank runs”, but nonetheless the same logic applies to the real estate sector and it’s played an indispensable component to accurate real estate valuations. 

    If you take nothing else away from this article, use the DCF Method whenever possible. Especially in today’s ever-changing real estate market, periodic cash flows are a must to have a successful, long-term real estate holding. As with any other investment, do your due diligence, ensure you have the right team around you, and take calculated, well-thought risks. Good luck to all continuing to navigate the post COVID-19 real estate landmine!

  • Twitter is the Ultimate Cryptocurrency Stock to BUY NOW

    Twitter (NYSE:TWTR) shares have soared more than 55% and counting in the past year, 2021 (Sun, The Motley Fool). An iconic platform best known as a micro-blogging social network, Twitter is quickly evolving. Moreover, it’s developing into something that’s likely even more influential and lucrative with the rise of cryptocurrencies. 

    Back in July 2021, Chief Executive Officer (CEO) Jack Dorsey announced that Bitcoin would become a “big part” of Twitter, specifically via integration with the company’s products and services. While this may not be well-known to investors, Twitter has already seen a huge rise in its bottom line due to the influx of cryptocurrency developers (Sun, The Motley Fool).

    An Extremely Unique Advantage for Twitter

    Unlike with stocks, there isn’t a centralized Securities and Exchange Commission (SEC) database (called EDGAR), where investors can go and get the latest information and financials for cryptocurrencies; until now. Twitter is quickly beginning to play the role of a “decentralized SEC” for the crypto community. Users can follow developer teams on Twitter, thereby getting the newest information on material changes in protocol, new partnerships, and significant events (the equivalent of 8-Ks at the SEC), as well as regular financial reports (10-Qs and 10-Ks). Furthermore, individuals can even report cryptocurrency tweets deemed to be scams or pump-and-dump schemes. A common practice in the vast majority of equity markets, this leads to a prototype of self-regulation (CFA Institute).

    Due to this phenomenon, Twitter is becoming exceedingly popular among altcoin networks such as Ethereum, Avalanche, Solana, Reserve Rights, Chainlink, Monero, and PirateChain, amongst many others. Their setup has attracted likely millions of users specifically desiring to stay up-to-date with the development of their latest tokens. Twitter’s capitalized on this financially by charging developers to promote their accounts via advertisement spending. Developers are incentivized into this because traffic is organic and directly within their target audience. Through this process, Twitter doesn’t even need to spend money on their own advertising. Celebrities, such as Tesla’s CEO Elon Musk, repeatedly use the platform to tout digital currencies such as Dogecoin to his fans, obviously generating substantial viewing activity.

    Financials Back Up Recent Boost in Success and Future Hype for Twitter

    During the second quarter of 2021, Twitter grew its monetizable daily active user base by 10.8% year over year to 206 million (Twitter, Inc – Financial Information). During the same time, revenue grew by a stunning 74% to $1.19 billion (Twitter, Inc – Financial Information). The company’s earnings have recouped their losses from the pandemic recession. Moreover, they more than doubled in the quarter ending June 30th (Twitter, Inc – Financial Information). They’re very clearly currently on track for stellar growth.

    Additionally, Twitter is doing well in terms of liquidity, with cash and investments outweighing its debt plus convertible notes by a factor of two (Twitter, Inc – Financial Information). Most experts agree it is both a great tech and crypto stock to buy at 10 times revenue. Expect continued profits and share gains as part of the boom in cryptocurrencies.