What Should You Know About Cryptocurrencies and NFTs

 Bitcoin is at $58,000! An NFT Recently Sold for $69 Million! Should I Buy? (As of mid-April 2021)    

At times certain new forms of investments attract a lot of attention. Over the past dozen years, Bitcoin, self-described as both an “innovative payment platform” and “a new kind of money,” has certainly been noticed among investors. In fact, over 4,000 cryptocurrencies like Bitcoin are currently in existence. But with all this new information, platforms, and currency, many investors are left with questions.

Let’s start with the basics. Digital currencies, or cryptocurrencies, are stored in a “digital wallet” – a type of online account, in which transactions are verified and records maintained by a decentralized system. Through the application of blockchain technology, transactions are recorded and stored. Digital currencies can be utilized to purchase merchandise from some sellers, often anonymously. There are also “digital current exchanges” that allow individuals to buy and sell digital currencies via different traditional currencies (such as the U.S. dollar).

Due to the lack of a centralized or regulatory system, most digital currencies are not backed by a country’s central bank, nor is their value backed by the ability of a country to tax its citizens.

So why do digital currencies have value? Supply and demand.

Most digital currencies possess a limited (scarce) supply. Take bitcoin for example. There’s currently over 18.5 million bitcoin in circulation, and there will only be 21 million bitcoins that are digitally “minted” and “mined” in the future. This limited supply drives up demand, thus driving up value. Scarcity with perceived value coupled with periods of demand can at times create a frenzy for Bitcoins and drive the price higher.

Due to this ever-changing, and unregulated landscape, there is no reliable way to predict price. If demand exists, to some measure price can remain supported. When demand wanes, large swings in price momentum occur and the price will fall – often precipitously.

A crucial point to note is that cryptocurrencies possess no real intrinsic value – a key measure of any investment. Over the long-term cryptocurrencies have not proven to be a good store of value. Prices are driven by supply (often finite) and demand (which varies over time).

Another digital currency that has gained popularity in recent months are non-fungible tokens (“NFTs”). NFT’s digitize and “tokenize” certain artwork, sports highlights, and even memes. These digital assets can be bought, sold, and traded. NFT ownership and provenance are always tracked by a blockchain.

In alignment with our investment philosophy, we regard both cryptocurrencies and NFTs as speculative investments. When new investments like these appear with early gains, the stories that follow can often allure investors to part with hard earned funds. Particularly with cryptocurrencies and NFTs, it is common that investors will see high transaction costs to even access these types of investments. Additionally, the volatility of cryptocurrencies and NFTs increase the risk of loss for their entire value. Finally, due to the lack of regulation and information available, ARGI’s evidence-based investment research currently does not support any current allocation to these emerging asset classes.

With that being said, we view our role as prudent investment managers is to help our clients understand all aspects, risks, and rewards regarding our clients’ investments strategies. If you’re interested in exploring these types of investments, we’re here to help you better understand what these investment opportunities could mean for you.

One day crypto/NFT may become an asset class that does contain intrinsic value, and could be part of an overall portfolio allocation. In today’s marketplace, there are multiple investment opportunities that possess true value, as opposed to many of the digital currencies and NFTs – which may be mere pieces of paper floating on a digital wind.

This original blog was posted on April 15, 2021 at: https://argifinancialgroup.com/argi-insights/ 

Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is a professor of finance within its Gordon Ford College of Business.

Called “Dr. Bear” by his students, Dr. Rhoades is also a financial advisor at ARGI Investment Services, LLC, a registered investment advisory firm headquartered in Louisville, KY, and serving clients throughout most of the United States.

The author of the forthcoming book, How to Select a Great Financial Advisor, and numerous other books and articles, he can be reached via: bear@argi.net. 

Will inflation rear its ugly head?

In the past 50 years prices of goods and services have increased substantially. In 1972 a new home went for $25,200, a new car $3,560, a movie ticket for $1.50, and a dozen eggs for 45 cents.[1] Unfortunately, we all know those prices are no longer the case.

For many of us, we’ve become accustomed to inflation. Since the 1970’s, Americans have experienced an average inflation rate of 3.84%. To put that in perspective, what cost $1,000 in February 1971 for goods and services, cost $6,592 in February 2021.

At its core, inflation is largely driven by:

• An increase in the cost of the raw materials and/or labor used to produce goods and services; and/or
• A rapid increase in the demand for goods and services, without an equally rapid increase in productivity or supply.

While in 2020 the demand in certain service sectors declined precipitously, the demand for home consumption goods increased. The pandemic caused major slowdowns in the transport of goods which exacerbated supply shortages in all areas of several goods.

For example, oil and gasoline prices have trended higher recently, partly due to cuts in supply but also to increased demand as major economies around the world recover from the COVID-19 pandemic. Other imbalances between supply and demand exist. Currently, demand exceeds supply ranging in areas as diverse as housing, semi-conductors, steel, and packets of ketchup.

Additionally, there are the factors of monetary and fiscal stimulus.

Monetary stimulus are the actions taken to manage an economy’s money supply – this would be the U.S. Federal Reserve Bank (FED) for the United States. Think back to 2007-09. The FED began to inject massive monetary stimulus to the economy to fight deflationary pressures that began during the Great Financial Crisis. The FED lowered short-term interest rates, and purchased fixed income securities (bonds) in the open market. This action is designed to contain long-term rates from rising due to market pressures.

Fiscal stimulus are the actions to boost an economy through increased spending. To combat the economic impact of the pandemic, the U.S. government added $3.1 trillion in increased government spending and tax credits in 2020. Additionally, in mid-March 2021, the government added a second fiscal stimulus of $1.9 trillion in Covid relief, including a $3 trillion dollar infrastructure spending package under consideration.

Combined monetary and fiscal stimulus have raised fears among many economists that the U.S. economy will “overheat” and bring on inflation. Indications of that anticipated inflation have shown up in higher yields from intermediate- and long-term bonds.

Another concern among economists is a change in FED policy. The current policy is an inflation target to average 2% a year. This is a departure from the previous FED policy of “price stability” (zero inflation). This change in policy is suspect but it may allow the FED greater discretion to pump up money and credit which to some economists means the FED might permit inflation to run as high as 3% a year for an extended period.

So, will prices rise substantially?

With this monetary and fiscal stimulus, and as the recovery continues, business and consumer spending will likely increase, and more instances will occur where demand exceeds supply and leads to price increases.

In addition, concerns about labor shortages exist in many areas such as health care and information technology that require acquired skills where not enough trained workers exist.[2] This skills mismatch places pressure on employers to raise salaries and wages.

The combination of these developments has brought forth fears of higher inflation. Yet not all economists agree. Some argue the stimulus package will stimulate needed growth without undue inflation. World Bank chief economist Joseph Stiglist argues that the FED will be able to tamper inflation by returning to a more normal monetary policy.[3]

It’s uncertain whether demand-driven economic growth will in fact spur inflation to substantially higher levels. New economic developments (predictable or not) may occur – positive or negative – that further increase or decrease the demand for goods and services, or which may substantially affect the costs of raw materials and labor. The future of the U.S. and world economy is always uncertain.

So, will inflation rear its ugly head? Prospects for higher inflation are greater now than they were a year ago. There will certainly be instances of higher prices for some goods and services. Whether widespread and sustained inflation occurs will depend on the extent demand exceeds supply – imbalances created by COVID-19 and its after-effects, including government policies. Future inflation will also be affected by how quickly any imbalances that do occur are corrected though expanded production and the increased transport of materials, components, and completed goods.

[1] “Remember When” infographic for 1971, from Seek Publishing.

[2] See, e.g., https://hechingerreport.org/opinion-why-we-must-invest-in-new-innovative-workforce-training-to-fill-a-skills-gap/.

[3] Dan Rabouin, “1 big thing: Stiglitz says Biden’s spending could mean ‘a new world’,” Axios, March 30, 2021.

This original blog was posted on April 22, 2021 at: https://argifinancialgroup.com/argi-insights/ 

Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is a professor of finance within its Gordon Ford College of Business. Called “Dr. Bear” by his students, Dr. Rhoades is also a financial advisor at ARGI Investment Services, LLC, a registered investment advisory firm headquartered in Louisville, KY, and serving clients throughout most of the United States. The author of the forthcoming book, How to Select a Great Financial Advisor, and numerous other books and articles, he can be reached via: bear@argi.net. 

Why would some investors desire the stock market to go down?

 

A Bear’s Paws

(The original of this blog was posted on May 6, 2021 at https://argifinancialgroup.com/argi-insights/.)

Why would some investors want the stock market to go down?

The U.S. stock market is near its all-time highs and many analysts suggest it’s overvalued significantly. So, the above question seems odd doesn’t it? Or is it?

Investors are optimistic. They put money at risk in hopes it will go up in value – not down. They don’t desire for the economy to decline. So why would they want the market to go down? Simply put… buy low, sell high.

Why investors might want stocks to decline in value?

On Feb. 19, 2015, $1,000 purchased roughly 19 shares of the Vanguard Total Stock Market Index Fund, which is a fund weighted on market capitalization and is the entire basket of U.S. stocks. Now, fast forward six years. $1,000 purchases less than 10 shares of the same fund – this disregards dividends and capital gains which would approximate 2% per year.

This raises the question: buy stocks at a cheaper value, or later at a much richer price? The answer of course is “I want to buy stocks when least expensive!”

The inherent problem …When is the high? When is the low?

No one rings a bell at the top or the bottom. The stock market can go to higher highs and lower lows. The lows may be temporary and minor. But they also may last several years or longer and may be severe.

History has shown that to predict the markets direction consistently over long periods of time seldom works.

So how do you invest when everything seems too high?

Investment is not speculation. In our experience, trying to time the market never works 100%. First, embrace investment strategies that have worked over long periods of time. Second, use a disciplined approach. Third, talk to an investment professional.

We believe an investment strategy that considers all available data, your risk tolerance, and a diverse asset allocation can be the roadmap to help you meet your investment goals.