How Warren Buffett's Classic Advice Applies to Cryptos Today

Fear, greed, and kryptonite... How Warren Buffett's classic advice applies to cryptos today... The Crypto Fear and Greed Index is at an extreme... Chinese officials scream 'ban' in an emerging market... Who actually sold during the crypto sell-off?...

If you've invested for any length of time, you've likely heard this classic line before...

Be fearful when others are greedy, and be greedy when others are fearful.

It's one of legendary investor Warren Buffett's most famous pieces of advice.

Buffett first wrote the words in an October 2008 opinion piece in the New York Times, titled "Buy American. I Am." In the article, he talked about being bullish American corporations in the long run... even though the world was in the depths of an uncertain global financial crisis at the time.

Financial-services giant Lehman Brothers had just failed a month earlier... America had just woken up to the mortgage sham that had been going on for years... Millions of people were scared to death about what would happen to their money and livelihoods...

Many previously unimaginable government bailouts were still to come...

And yet, Buffett saw it as an incredible opportunity to buy stocks...

It might've seemed like a contrarian thing to believe at the time, but he was clear in his thinking. As Buffett wrote on October 16, 2008...

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

That's when Buffett dropped the now-famous line, as he explained his reasoning...

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Buffett was right, of course...

The major U.S. stock indexes hadn't yet bottomed when Buffett wrote his opinion piece... That happened five months later in March 2009.

But still, when everyone else was fearful that day, if you simply bought into an S&P 500 Index fund – as the "Oracle of Omaha" often suggests new investors do – you would've fared quite well... You would be up roughly 345% with that position today.

The scars were left on the economy. We're still dealing with the fallout... and seeing the same type of central bank stimulus we saw back then on a much bigger scale today.

As for the specific companies Buffett alluded to buying back then – the big ones that "will be setting new profit records 5, 10 and 20 years from now" – well, last month, large American corporations like Apple (AAPL), Alphabet/Google (GOOGL), Facebook (FB), Microsoft (MSFT), and Amazon (AMZN) reported quarterly earnings that were eye-popping and record-setting in many cases.

In 2008, Buffett was talking about U.S. stocks, of course. But the thought applies to other assets, too...

We were reminded of this concept when we read the most recent update from Crypto Capital editor Eric Wade, which he sent to his subscribers Monday.

Let me (Corey McLaughlin) be as clear as I can before we get into the meat of today's Digest...

Owning cryptocurrencies is distinctly different from owning shares of major, earnings-generating American companies. Bitcoin should not be treated like shares of, say, Starbucks (SBUX) in your portfolio...

Cryptos are much more volatile, as we've seen over the past few weeks. And they come with much more different risks than owning stocks.

As an asset class, cryptocurrencies are only about 13 years old. And they appear to be experiencing major sell-offs as frequently as the U.S. banking and financial system had crises and panics in the 18th century (like 1791, 1792, and 1796), when it was just starting to mature.

Yet bitcoin and other cryptos also present a different kind of upside than stocks or other investments that one might consider "traditional" today.

And we believe the idea that Buffett was talking about... about how extremes in bullish or bearish sentiment in the market can create buying opportunities, or also alert you it might be time to sell... is applicable to all asset classes – from stocks in 2008 to bitcoin today.

Our new friend and Chaikin Analytics founder Marc Chaikin described this another way in our Masters Series interview over the weekend...

My whole mantra has been that fundamentals drive the market, but that emotions drive the market to extremes.

As we wrote about in the Digest last week, bitcoin and other cryptos have sold off significantly...

On the surface, the main factors for the sell-off are China's renewed crypto "ban" threat, several Elon Musk tweets, and a handful of other discouraging news items – like the U.S. Treasury Department now wanting records of crypto transactions of more than $10,000.

These events make scary headlines for crypto investors. And as Eric wrote in his special alert on Monday (existing subscribers can read the entire note right here)...

The past few weeks have been tough for the crypto market... We've been hit with what feels like a public relations campaign of negative stories about cryptocurrencies. Celebrities, China, tax collectors, central bankers, politicians, and prominent religious figures have all spoken out against the market.

If we listened to them, we'd be selling everything.

But 'selling everything' is NOT what Eric recommends today...

In fact, Eric says that if you believe in the long-term potential of cryptos like he does – in the fundamental story of cryptos as a revolutionary breakthrough, which hasn't materially changed despite the recent headlines – you should do everything but sell today.

Why?

Because, as Buffett said... when others are fearful, it's wise to be greedy. We'll add that it can also help to be sane and do your own research. As Eric wrote on Monday, he believes crypto holders have three options today...

1. You can simply hold your cryptos through this volatility. It may take a week, a month, or a year for the crypto rally to continue. This game plan requires a firm resolve to hold on to investments that are out of favor or even ridiculed...

2. You can harvest your losses. One of the fears pushing down cryptocurrency prices has been the threat of taxation. You could use this to your advantage.

If you're sitting on large gains and you're in a jurisdiction where your income or investment gains are taxable, you could use the sell-off to offset a significant tax bill. Just keep in mind... Typically, you can't sell an investment and then buy it back within 30 days if you expect to claim the loss...

3. Use the sell-off as a buying opportunity. [The Crypto Capital] model portfolio is made up of sound crypto projects. Their prices have fallen temporarily, but we expect quality projects to recover as fear subsides.

So now is a great time to buy cryptos you don't already own positions in or to add more to your favorite positions.

If you ask us, other than the COVID-19 panic bottom in March 2020 – when, you might remember, our founder Porter Stansberry banged the table to buy U.S. stocks just like Buffett did back in October 2008 – we can't recall a more obvious and significant example of "fear opportunity" than the one we see in cryptos right now.

Of course, you also must remember that our advice on proper asset sizing applies to cryptos, too... Don't put any money in that you can't afford to lose in the short term, for reasons like the rapid sell-off that just happened.

But if you're the type of person who believes bitcoin is headed to $100,000 or more one day (or potentially to $1 million, as Eric does)... or if you're like many of our subscribers and bought bitcoin well below its current price and are already sitting on massive gains... buying opportunities like this one might not come around too many more times.

For one thing...

The Crypto Fear and Greed Index recently hit its lowest point since March 2020...

As you might've guessed, this index measures the prevailing sentiment among cryptocurrency investors.

Created by software company Alternative, it's calculated by measuring volatility readings, crypto trading volume, social media sentiment, market-share data of the major cryptos and "alt coins," and other trend behavior. From Eric's update on Monday...

When the reading is near 100, it signals extreme greed in the cryptocurrency markets. This typically signals a correction in the market. On the other hand, a rating near zero signals extreme fear in the markets. And that could be a signal for a buying opportunity.

Today, the Index reads 10. A rating this low means that "crypto diehards" are the only ones with any optimism left.

You can see there's strong volatility in this index itself, which tells you these extremes haven't lasted long in the crypto world over the past few years.

As we write today, the rating has already climbed to 22 in concert with a roughly 20% move higher in bitcoin's price – from a low near $32,000 on Sunday to around $39,000 as we write. That big swing over just a few days tells us something on its own...

People are already turning bullish again.

And here's the critical point we want to make today...

Other investors, mainly the institutional firms and digital-payments platforms in the U.S. that pushed bitcoin's price higher in the first place over the second half of 2020, never sold at all.

This "top and pop" in the crypto space – which was inevitable in some respects, as DailyWealth Trader editors Ben Morris and Drew McConnell warned – appears to have been driven mostly by the fear and greed of speculative individual investors...

And we track the source back to what can often be an inexperienced investor's kryptonite – leverage.

Who actually sold during the crypto sell-off?...

Was it Elon Musk? Maybe, but it doesn't really matter. We'll see in Tesla's (TSLA) next quarterly filings... but we suggest you look elsewhere anyway.

We don't often quote mainstream outlet CNBC because the click-bait nature of the operation strikes us the wrong way. But this article from yesterday was worth reading for the nitty-gritty about who actually sold during this crypto sell-off... and more important, why they did.

Brian Kelly, CEO of digital-currency investment firm BKCM, pointed to risk-taking short-term traders who needed to make "margin calls" when bitcoin's price started dropping on the bad headlines...

As regular readers know, when traders use margin, they essentially borrow money from their brokerage firm to take a bigger position... In this case, they were doing it with bitcoin.

And when they do, there's often a set price in bitcoin that triggers selling to make sure these traders can pay back the exchange on which they made the margin trade.

So if bitcoin drops to a particular price – like $35,000, for example – a cascade of additional selling could happen by leveraged traders betting the bitcoin's price would only go up. From the CNBC article...

Kelly... pointed to firms in Asia such as BitMEX allowing 100-to-1 leverage for cryptocurrency trades. Robinhood does not allow traders to use margin for cryptocurrency, and Coinbase only allows it for professional traders.

"You get this crowd factor – everybody's liquidation price tends to be somewhat near everyone else's – when you hit that, all of these automatic sell orders come in, and the price just cascades down," Kelly told CNBC.

Bitcoin traders liquidated roughly $12 billion in levered positions last week as the price of the cryptocurrency spiraled, according to bybt.com. This mass exodus wiped out about 800,000 crypto accounts.

In other words, when Chinese officials scream "ban" in an emerging market and bitcoin's price drops sharply, it's easy to see why potentially 100-to-1 leveraged traders in Asia would be forced to sell quick.

(As for that proposed ban, as Eric has said before, the threat is nothing new... And in his expert opinion, the reality simply isn't possible. Countries that don't adopt freely trading cryptos are bound to fall behind those that do in myriad ways.)

In the crypto world, the growing 'DeFi' industry also intensified the sell-off...

Decentralized finance (DeFi) platforms like BlockFi and Celsius store investors' crypto holdings in exchange for an interest rate... and the ability to lend those holdings – be it bitcoin, Ethereum, or others – out to hedge funds and other professional traders.

This part of the crypto world has grown significantly in 2021, as we've reported and expected. Two weeks ago, more than $80 billion was "locked" in DeFi platforms... That's up from less than $1 million a year ago, according to the website defipulse.com.

These DeFi platforms also let people take out loans backed by cryptos like bitcoin. But if the price of the crypto drops 30%, the person who took out the loan could be on the hook for 30% more than they anticipated to the lender.

Amid the sell-off, more than $30 billion ended up flowing out of DeFi platforms. The amount in these platforms has once again risen in recent days, though... It's back up to around $63 billion today. As BKCM's Kelly said...

As you hit a certain collateral level, firms will automatically sell your bitcoin and send the collateral to the lender. This adds to the massive cascade effect – there was so much volume that most of the exchanges broke.

In some ways, the lack of regulation in cryptocurrencies (and we think, more so, the lack of education among many new investors) – for better or worse – is coming through loud and clear here...

Certain traders or borrowers have likely been burned in this sell-off... and might be wringing their hands at Musk or Chinese officials because of it. And they may promise themselves that they'll never touch cryptos again, or at least be scared of them today.

But of course, we urge folks to think differently...

This is where smart investors can see the big picture and the lessons at work...

When you treat your money like what it is... yours... a lot of things can come into focus.

First, this is another reminder to be wary of leverage, especially if you don't understand where your money that is tied to the leverage is actually going and what assets or mechanisms it is linked with.

For instance, we've said before that we're fans of the type of yield DeFi offers – like, you know, what the old-fashioned banks used to do. But interest rates don't appear from thin air without risks... And we're certainly not going to recommend anyone take out a loan using bitcoin as the collateral, at least not yet. It's simply too volatile, for starters.

If you're interested in learning more about how "crypto yield" really works, be sure to check out our colleague Dr. David "Doc" Eifrig's latest issue of Income Intelligence.

It's a must-read, comprehensive look for anyone who has unanswered questions about the space and how to know if it's right for you. (If you don't already subscribe to Income Intelligence, click here to get started.)

Doc's senior analyst, Matt Weinschenk – who was an early bitcoin "miner" – spent an entire month exploring the details of DeFi and reported everything he found in the May issue. As Doc and Matt wrote...

This isn't so much a question of "Does crypto income work?" but rather, "Whom does crypto income work for?"

If you have a $10,000 checking account, have never touched a crypto before, and are looking for a way to supplement your income... crypto yields aren't the way to do it.

If you're an early crypto investor who made $20 million in bitcoin, that means you know cryptos, you can trade big enough to cover the fees, and you can put $2 million into yield farming to earn $200,000 a year (at the risk of losing 10% of your bitcoin winnings). That makes total sense to us.

Most likely, you're somewhere in between those two characters.

This information, as great as it is (and we again emphasize that if you're interested in this topic at all, you should read Doc's latest issue), is all secondary to our main point today, though.

We sense that probably the more relevant advice – when it comes to the broader bitcoin and crypto sell-off that has scared a lot of people – is to remember what Buffett (but not his partner Charlie Munger) said...

Be fearful when others are greedy, and be greedy when others are fearful... or at least be somewhere in the middle.

As Eric said last week and we shared in the Digest, healthy bull markets include volatility and sell-offs. That's what we think we're seeing today. As Eric told his subscribers...

At Crypto Capital, we're part of the crypto optimists stopping the Fear and Greed Index from going to zero. As we've said before, there's no stopping innovation. Cryptocurrencies and the blockchain are revolutionizing our current technological and financial systems. Multibillion-dollar companies continue to invest in the technology. So blockchain and cryptos aren't going anywhere.

So this is the plan we're following in our model portfolio. You see, pessimists play so they don't lose... while optimists play to win. Our model portfolio is full of unstoppable peer-to-peer technologies that don't need celebrities or governments to function. This allows us to look past much of the noise. As long as our investment thesis doesn't change, we plan to hold our model portfolio holdings...

To sum up... I know that many folks are shocked and disappointed by how volatile the crypto market has been recently. That's why it's more important than ever to practice proper position sizing and stay unemotional about your investments. Never invest more than you can afford to lose.

This is another example of why we keep saying you won't find a better guide to cryptocurrencies than Eric and his Crypto Capital newsletter. (Find out how you can gain instant access to Eric's research today at 50% off the normal price right here.)

It's easy to look like a wizard when prices keep going up. But it's tougher to make the right calls when things look like they're turning against you. And yet, Eric is helping his subscribers navigate these rough waters and is highlighting exactly what he believes they should be doing today.

Today, it looks like many speculators have been shaken out of the crypto market... and the true believers are still holding on. The long and the short of it is this...

Stay the course. And maybe even buy some more cryptos if it's right for your portfolio.

Marc Chaikin: The Biggest Stock Pick of My Career

Last night, thousands of viewers tuned in to hear what Chaikin Analytics founder Marc Chaikin describes as the biggest forecast of his 50-year investing career.

And in an interview with our colleague Daniela Cambone earlier this month, Marc talked about his prediction, his "Power Gauge," and the sectors he says are hot and not worth touching today...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 5/25/21): Richemont (CFRUY), Centene (CNC), Commvault Systems (CVLT), SPDR EURO STOXX 50 Fund (FEZ), Hershey (HSY), Invitation Homes (INVH), Motorola Solutions (MSI), Nestle (NSRGY), Invesco S&P 500 BuyWrite Fund (PBP), and Consumer Staples Select Sector SPDR Fund (XLP).

In today's mailbag, a subscriber writes in about Marc Chaikin's "Prediction 2021" event that went live last night. Do you have a comment or question? As always, send it to feedback@stansberryresearch.com.

"I usually don't complain about free products, but...

"I live in the Pacific Time Zone, sometimes work, often eat supper about 6 p.m., and occasionally manage to listen to a webinar while it is live. Frequently there is some sort of interruption (I promise that I didn't touch the mouse, or even brush against it) and I am spat out of the presentation. If you watch the Metropolitan Opera free streams, you might notice that they can be resumed at the last interruption, or, like a YouTube video, started within the stream (after the advertisement, of course.)

"Mr. Chaikin seems quite sensible and accomplished, and his system seems to resemble the description of Mr. Louis Navellier's at InvestorPlace. Nevertheless, I was not able to complete viewing the presentation after three attempts. I was reminded of a childhood game called 'Snakes and Ladders' where arrival on the wrong square precipitated the player back to the starting box." – Paid-up subscriber Robert T.

Corey McLaughlin comment: Robert, although we've never watched a Metropolitan Opera free livestream or played Snakes and Ladders, we hear your frustration...

If you want to try watching Marc's event again, you (and anyone else who might've had trouble or missed it) can view the full replay right here.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 26, 2021