Bill’s Blog | August 11, 2022
So, how do you know if a crypto project is legitimate or a scam? As I have stated many times, I believe most crypto projects will fail. Having said that, I am a long-term bull on this technology, and there is still time to learn and participate. Second, I am a firm believer in cycles, and there is a time to be in an asset class and exit for a season. Third, what is a project’s primary purpose, and where are they in their development? Are they generating revenue or only surviving by raising endless capital? Is the project highly leveraged? Finally, what fundamental characteristics should you look for before you invest or speculate in crypto projects? After decades of speculation, learning from many mistakes, and even trusting untrustworthy people, I have learned a few things.
Are we still in a crypto winter, a bear market rally, or something else? I will hopefully provide answers to these critical questions for those who care about the crypto market and want to learn about this exciting technology. Yes, the crypto and blockchain innovation is a game-changing technology and here to stay, but there are still many hurdles to overcome, as with all innovations. The one thing I am highly concerned about developing in this industry is Central Bank’s digital currencies (CBDC) due to their ability to track everything you do and control your financial future. But, that is a big topic for another day. So let us get started.
To be clear, I am not promoting any particular project in this blog. In good profits, I exited most of my positions last year and my final tranche in February 2022 before the crash. However, I still hold one project where I still have a sizable position, and I hope to start exiting some profits next year once it is tradable on an exchange. I hope to reenter this market in the future when the timing is right. As I teach in my course and seminars, understanding market cycles is critical when you invest in any sector or company. For several reasons, it is not the right time to have a prominent position in the crypto markets.
So, we recently went through a wave of significant bankruptcies in the decentralized finance space (Defi). Why? Too much leverage and non-disclosure to investors of the extreme risks they were taking to make profits. High debt in a crashing market exposes poorly run companies and destroys capital. Or, as Warren Buffet famously said, “You find out who is naked when the tide goes out.” This scenario has played out 10s thousand times, the dot.com craze of the late 1990s and the 2007 to 2009 real estate and stock market crash. A key point you need to remember is that history repeats, and please don’t get caught at the wrong time in a cycle! Many people make this mistake based on a lack of knowledge, pride or the hype about making fortunes.
Other critical factors to look for in quality projects.
- Does the leadership team have real accountability? Having experienced and proven leadership is critical to a project’s success. Remember, companies do not fail, but people do.”
- Is there full disclosure of how the money is handled, and do they provide a complete annual audit? If you cannot obtain this information, staying away from the project is your best option. Remember, losing your capital is not a good option.
- Does the project have a real-world application and significantly improve a current process or growing need (faster, less expensive, and sizably enhances a business)?
- Can the project create growing revenue based on their model? First, make sure you understand their revenue model. If there is no revenue after 5 to 10 years, most likely, the project will fail. However, there are examples like Tesla or Amazon that, for years, made little to no profits but eventually became profitable (these are exceptions, not the rule). Avoid projects that need continuously raised capital and no revenue streams unless you can get in and out quickly on a trade.
- Remember, if the project is a real business, it will create sizable revenue and profits once it is through the startup phase (5 to 7 years in most cases). Yes, all startup projects will require investors’ capital, but it needs a clear plan to create ongoing revenue and good stewardship of the capital.
- Does the project have real utility in the marketplace and consumer demand? If there is no consumer or business demand, the project will fail.
- Does the project provide innovation in the marketplace? Unfortunately, many copycat projects usually do not make it because the first to the market has an overwhelming advantage.
- Does the company/project meet regulation investment standards (still being developed in many cases and countries)? Most projects are considered securities by regulators. In the USA, the regulators have a very imputative method for companies they red flag. Then, they take the project to court and ask questions after! To me, this is a complete failure by the regulators doing their job. In my mind, good regulation should set healthy and reasonable industry standards to help companies succeed and protect consumers.
Let’s look at the current markets, and I will make some observations.
- The crypto market has a very high correlation to the general stock market. If the stock market rallies as it has the last month (bear market rally, in my opinion), so follows the crypto market, which has also gone up. If the stock market crashes, so will the crypto market. Bitcoin’s upside potential is $25K to 28K, downside 10K to 12K and even further if we have a significant crash. Think Bitcoin 3.5K or less!
- I still believe we may continue to have a short-term rally, but the bear will return, and the crypto winter will become darker for a season, as happened in 2018. The crypto winter is not all bad, just part of a cycle, and opportunities will arise in the future with quality projects.
- There are still far too many significant risks in the world today and markets that are not being resolved:
- War and the risk of expansion and new flashpoints are sadly developing in other regions. The invasion by Russia and its destruction continues with no “statesmen” to end this conflict. Mrs. Pelois’s visit to Taiwan did not help but may accelerate the communist CCP party’s desire to take over Taiwan. Also, things in Israel with terror threats and hundreds of rockets do not bode well for peace in the region. Remember, many other cycle experts and I have warned that we are in the timing of the war cycle, so none of this surprises me.
- Inflation continues to be a severe threat to global stability. In many cases, the blame for this crisis falls at many politicians’ feet with their unsustainable debt expansion, virtue signalling and no intelligent plans. Then there is the World Economic Forum (WEF) agenda which is outright scary. If you are not paying attention, you should, as they have clear plans for your life and mine by 2030! When people cannot afford food and the cost of energy doubles or tenfolds like in the EU for natural gas, there are serious consequences. We now have protests and riots, as seen in many nations. The EU energy crisis was 100% fabricated by politicians who removed stable and diverse energy sources, thinking they could go green without backup. The problem with solar and wind is they do not provide a consistent base load energy. Lastly, CB’s raising interest rates by .5 to 1% shows the central banks are not serious about taming inflation. Plus, the Fed stated they would significantly reduce their balance sheet, and to no surprise, they have done very little. If they were committed to ending inflation, as they say, they would have raised rates by 3 to 5% at a time. Yes, inflation would end in short order. But, the problem is that the global economy would collapse, and there would be unthinkable bankruptcies! Many have suggested we end central banks entirely, and I agree as they continually fabricate these crises, and humanity pays the price.
- China has a massive housing crisis created by corrupt regional governments and developers. Millions of people are protesting and refusing to make mortgage payments. Why? Many developers are bankrupt due to too much debt and not building the people’s homes. The housing market makes up 30% of China’s GDP, and next, we will hear of many Chinese banks in trouble.
- The high US dollar also puts extreme pressure on emerging markets that have borrowed over 15 trillion in debt. Many nations’ currencies are collapsing (due to too much money printing), and they must repay in US dollars. Expect sovereign debt crises to continue.
- The EU also has huge debt issues. As GDP drops in the EU, this will exasperate the crisis as governments will not be able to service debt and meet their county’s obligations.
- Expect the bear market rally to end in the fall or early winter, and both crypto and stock markets will sharply decline.
- So, no rush to enter the crypto markets unless you are a short-term trader.
- This is a great time to do your homework, build your capital, select 5 to 10 best-in-class projects and put them on your watchlist. Once we have a clearer picture of market direction (we have not hit any bottoms yet), then consider slowly taking positions in tranches. When there is blood in the streets, and no one wants any crypto, that will be a great time to start purchasing quality projects. The strategy takes insight, courage and discipline, but if you can take action near the bottom, you can make significant profits in the coming years.
I have often said that ongoing financial education is essential to long-term wealth creation. So I invite you to join Mark Taucar (top Canadian portfolio manager) and me as we discuss markets, risks, and opportunities for the fall and coming year. Free, but you will need to register for this Zoom event.
Please join us on August 20 (Saturday) at 10 AM PST. The webinar is forty-five minutes, with Q&A to follow. Please register through the Zoom link.
https://us02web.zoom.us/webinar/register/WN_FZ-bX3HrTDGDtZpA6DUXSg
All the best,
Bill Westmacott, Owner
Fivefold Financial