You Have a Huge Advantage Over Institutional Investors Right Now
Editor's note: Bitcoin is badly misunderstood by the mainstream media and individual investors alike.
That's why we're continuing to share our exclusive interview with cryptocurrency expert Tama Churchouse, editor of the brand-new Crypto Capital newsletter. (If you missed last weekend's installments, you can catch up here and here.)
In today's edition of our weekend Masters Series, Tama explains why you have an upper hand on institutional investors... and how to separate worthwhile opportunities from the junk...
You Have a Huge Advantage Over Institutional Investors Right Now
An interview with Tama Churchouse, editor, Stansberry Churchouse Research
Sam Latter: A recent article in Fortune said bitcoin's "core use" is for paying for drugs or extortion fees on the Internet. I've read reports of users who have had their computers hacked and had to pay a ransom just to unlock their computers. What's your take on that?
Tama Churchouse: That's a common misconception. It's part of the media's ongoing narrative, and in many respects, it's understandable. Think back to the FBI's takedown of online marketplace Silk Road in 2013. People were selling drugs and stolen credit-card numbers. These criminals thought that because bitcoin operated independently of the U.S. government, their activity couldn't be traced.
But bitcoin is nowhere near as anonymous and untraceable as cash is. It's pseudonymous, meaning a bitcoin address can be tied to a particular user. You may not know who the user is, but he has an identity, just like a username on a website. In fact, the entire point of the blockchain is that every transaction is recorded. And just because a few bad apples have used it as a method of payment for unsavory activities doesn't mean it's the currency's core use.
Sam: In the past, you've said that individual investors have an advantage over institutional investors when it comes to investing in cryptocurrencies. Can you explain why that is?
Tama: Sure. A really good example of that is a good friend of mine who recently opened a cryptocurrency hedge fund. This guy is a world-class trader. His last job was with the Harvard Endowment Fund. Before that, he was with one of Asia's most successful hedge funds.
When he announced he was starting this fund, he got calls from dozens of sovereign wealth funds and institutional buyers around the world. You see, at the moment, there just aren't that many avenues for institutional money into the crypto space. That's the big thing. Institutional money doesn't really have a bridge into cryptocurrencies yet. A lot of private money and family office money has made its way into cryptocurrencies. But big institutional money has not made its way into cryptocurrencies at all.
Individual investors have a rare opportunity to get in ahead of the institutional money. The "smart money" is all tied up. It's a really lengthy process for an institutional pension fund, for example, to go through the process of allocating money toward bitcoin. It's a totally new asset class. Bitcoin is so new, and people are focused on the internal politics and questions about risk. But a couple of years down the line – and maybe sooner – that's going to change.
The second thing is, one day soon, you'll go into your standard online bank account and you'll be able to buy bitcoin. When it becomes that easy, it will be too late. The opportunity will have passed.
Institutional money is not in the space yet. Things are changing, and you have the opportunity, you have a huge advantage over that institutional money, because you don't have to go through compliance and internal politics. But as an individual, you can just go to an exchange, open an account, and buy some bitcoins.
Sam: Bitcoin traded around $6,000 on Friday, a new all-time high. It looks like we're in the midst of a speculative mania. Of course, U.S. stocks have been in a tremendous bull market of their own since bottoming in 2009. But it hasn't been a "buy anything" market.
Likewise, you can't simply go out and buy every single investment in the cryptocurrency world, either. How do you separate and identify the legitimate opportunities from the junk?
Tama: That's a great question. Let me put it this way... Every day on Instagram, the social-media photo-sharing service, I see at least seven or eight targeted advertisements for a particular initial coin offering (or "ICO") project. I ignore anything that advertises and is paying money for crypto on social media, for the most part.
But getting to the attributes we're looking for in a legitimate crypto investment, No. 1 is answering these questions: "What is the problem that this project is solving? Is this technology leveraging blockchain to solve a difficult problem that can't be solved without blockchain?"
I'm dismissive of companies that are just jumping on the crypto bandwagon by trying to transfer an existing business to the blockchain. I'm looking for something that truly benefits from decentralization... a crypto asset that solves a problem that can't be solved without blockchain.
The second thing is whether a company is addressing the global market. At this early stage in the development of the blockchain ecosystem, everything is a land grab. We want to maximize our bang for our buck. We want a company that has the capacity to go global. We want a crypto asset that can potentially be used by everyone on Earth, not just a narrow market.
The next thing to look at is the product launch horizon. A lot of ICOs will issue a white paper and say, "We'll take money from you and we'll build it." In short, they outline the technology they plan to build and then fund it by issuing some tokens in return for capital.
The key phrase here is "plan to build." There's an ocean of difference between putting an idea down on a white paper and building and executing a successful launch. This is one of the main reasons why I rarely advocate participating in ICOs.
Sam: Do you also take a close look at a company's management team?
Tama: Absolutely. That's next on the list. We want to see a team comprised of developers who have a track record of building and deploying blockchain technology.
Now, they don't necessarily need to have been successful in prior ventures. Microsoft CEO Bill Gates and late Apple CEO Steve Jobs failed in some of their early ventures.
A CEO doesn't need to be a computer scientist, but the team needs to have a strong understanding of how its project will address the points I just mentioned.
Another important factor is the community. You have to ask, "Does this project have a large community of followers and early adopters who will actually use whatever is being built?" A crypto asset is no good if nobody is using it and the token isn't widely distributed.
Blockchain protocols like ethereum are valuable because a huge number of users are behind it. If nobody is building on it or using the application, it doesn't have much value.
And the final thing is the token economics. Crypto tokens all have varying characteristics, but scarcity is an important one. Would you buy into a token that had 1 billion tokens currently issued if you knew that in three months, it would issue another 2 billion? Probably not.
All cryptos have completely different token economics underpinning them. Bitcoin, for example, has around 16.5 million in circulation at the moment. New bitcoins are mined every day, but the total supply will only ever be about 21 million. Other tokens are created in a single launch with a permanent fixed supply. And some specify an annual "inflation" to be distributed every year according to a predefined mechanism. Token supply has infinite permutations, so you need to analyze them accordingly.
Editor's note: Earlier this week, during our first-ever bitcoin webinar, Tama discussed a secret society he belongs to called "The Bitcoin 1%." It's made up of the most important and influential people in the crypto world... and it's totally closed off to the public. Tama just released a brand-new presentation explaining everything you need to know, including how you can use his access to this exclusive group to make thousands of dollars in profits per month. Learn more here.