Martin Pelletier: The old saying, ‘often the best trade is the one you don’t make’, comes to mind
This year has been a complete train wreck for cryptocurrency investors, claiming nearly US$2 trillion in market value and billions of dollars in frozen funds.
Nearly three-quarters of bitcoin’s and ether’s value has evaporated over the past 12 months, while others such as Luna have lost nearly all their value. We think the catalyst for the bursting of this dot-com bubble 2.0 is that interest-rate hikes have put an end to highly speculative assets, much as Alan Greenspan, former United States Federal Reserve chair, did back in 1999.
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This doesn’t mean segments such as cryptocurrency and blockchain technology do not have a future, but perhaps it’s just simply too early to tell what they will turn into, especially from a utility offering point of view. More concerning is that some very smart people seem to be getting this all very wrong and costing their investors.
Just last week, there was the collapse of FTX.com, a cryptocurrency exchange with some notoriety given that Tom Brady and Gisele Bündchen were in on it and its name graces the Miami Heat’s arena. Its valuation was subsequently whacked, falling by nearly 80 per cent to US$530 million.
Canada’s third-largest pension-plan manager, Ontario Teachers’ Pension Plan, invested in FTX last January as part of a US$400-million funding round that gave it an implied valuation of US$32 billion.
But let’s not forget the Caisse de dépôt et placement du Québec in August wrote off its $150-million stake in bankrupt cryptocurrency lender Celsius Network LLC.
“Celsius is the world’s leading crypto lender with a strong management team that puts transparency and customer protection at the core of their operations,” Alexandre Synnett, the Caisse’s executive vice-president and chief technology officer, said a year ago. “The (Caisse) and WestCap are eager to partner with them to share our expertise in the fintech sector as they continue to expand their services.”
So much for that plan.
Canadian pension plans have no doubt benefited by embracing the quantitative-easing-fuelled tech boom, earning some impressive returns that are only now beginning to be given back. But perhaps the latest developments in the cryptocurrency space show they pushed things too far.
As a portfolio and fund manager, the risk of having even a tiny but highly speculative position is that it blows up and the rest of your work — what the 99.9 per cent of the remaining portfolio is doing — gets ignored. You would think pension plans, or the so-called smart money, would understand this, or at least have the risk controls in place to prevent it from entering their investment process and philosophy.
That said, this doesn’t mean one shouldn’t embrace the opportunities that come with investing in early-stage technology. For example, we have a small slice of venture-cap tech, but it’s managed by a group of experts headquartered in Israel who oversee a pool of direct private investments into companies that have an actual operating business and it’s diversified across various sectors — everything from agtech and consumer software to fintech and health care.
But the one thing we don’t have are any direct cryptocurrency investments, because we simply can’t get our head around its functionality, convenience factor, which ones will be winners and losers, or even whether the entire segment is simply a losing proposition altogether. Simply put, it’s just way too speculative an investment at this stage of its life cycle even for a small position. We’re all too happy to let someone else take that risk.
There is a great saying in our business: “Often the best trade is the one you don’t make.” This type of thinking allowed us to avoid the whole Canadian legalization of marijuana trade, thankfully so given its utter collapse and the vast amounts of wealth destroyed by the hype promoted by many Canadian dealers.
Now that things have settled out, one should be able to get a better understanding of the kind of disruption legalization did or did not do.
Maybe it’s because we’re old-fashioned, but we try to avoid those sectors or companies whose business plans depend on near-zero interest rates and infinite amounts of inexpensive capital provided by the Fed and other central banks.
Scaling out a business or product and introducing true disruption that improves consumer affordability and, more importantly, convenience is easy to do when money is free, but not so much when there is a cost.
This is something that many are quickly being reminded of once again.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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