How to Play the Odds in the Crypto Casino

How to Play the Odds in the Crypto Casino

We’re living in the crypto casino now. The total value of cryptos fell 11% over the weekend. This wiped off billions in the valuations of all of them.

Why? Who knows. Maybe traders ran a big sell program to shake out the weak holders so they can buy them back cheap.

Maybe it’s the end of a massive bull run.

I think it’s a dip. News just keeps coming in to suck more people into these markets.

Already, two tokens — issued via an ‘initial coin offering’ (ICO) this year — have hit US$1 billion valuations. These two coins only began life in March and July 2017.

Both were issued at a price under $1 and now trade over $10 — despite neither of the companies behind them having a product to sell as of now.

These sorts of speculative gains in the crypto markets dwarf anything else on offer.

Total token sales for 2017 have eclipsed US$1.2 billion. This has surpassed the money that venture capital firms have raised for startups.

Some people say it’s a bubble now. I think this could keep running up and away for a long while yet.

Here are some clues as to why: Hedge funds are launching to invest and trade in cryptos. One reason is that bitcoin, for one, has no correlation to global stocks, commodities and traditional currencies.

Then we can add high share prices, low bond yields, inflated property, and the sheer amount of cash looking for a home.

One precious metals dealer in Australia is now dealing in trading and storing bitcoin.

Apparently, the surprise for these guys is the demand from self-managed super funds. These investors like it as a way to diversify, too.

You might thinks it’s all crazy. But the blockchain technology underpinning this new market is extremely compelling and could change a lot.

Just ask ASIC Chairman Greg Medcraft…

Why share trading looks archaic now

He’s cited in The Australian Financial Review today as saying regular bank accounts might become redundant. That’s if we all keep our money with the central bank and use an RBA digital currency.

This could ‘disaggregate’ the basic banking business model of using deposits as a cheap source of funding.

He may very well be right. But the banks aren’t sitting still on this.

Reuters reported last week that six big international banks have joined forces to create a new digital cash to settle financial transactions over the blockchain. They hope to launch it next year.

This could cut costs for the banks and reduce the amount of capital they need to hold against clearing trades.

And blockchain is coming for the commodity markets. The first one will probably be gold. This could take demand away from ETFs and future markets.

The gold will be stored in a vault somewhere, but traded and settled over a specific blockchain.

Speed is the key here. We’re talking instantaneous settlements.

This is beginning to make regular share trading look archaic. I mean, it takes two days for the ASX to fully clear a share transaction.

Cryptos trade 24/7, and worldwide, too. When you buy them, they appear in your account almost instantly.

Clue for the crypto markets might be here

Here’s another way we can look at this market, and maybe add some sort of indicator as a guide.

It’s all too new to be sure of anything.

But a company called AMD makes GPU chips. These are used (among many things) in the ‘mining’ process for cryptocurrencies like bitcoin and Ethereum.

AMD released a new chip last week and sold out in minutes.

Here’s why. Bitcoin miners, for example, are rewared with new units for each new block created. This involves solving complicated maths problems. Whichever miner does this first gets the bitcoin reward as a payoff.

This means crypto mining relies on raw computing power in a big way. The mining process underpinnng these networks is designed to get harder over time. So the incentive is fixed to always have the best and latest tech driving the mining.

You would think any systematic weakness in the crypto market would show up in chip sales. As of now, they look strong. Other companies are cashing in on this too. AMD is not alone.

As I say, this is just something to watch and see how it plays out. The most compelling thing about cryptos is that they are truly global. The potential demand is enormous. Access is easy, for almost everyone. That may change if some governments step in and attempt to put limits down, as China is rumoured to be doing.

But you have to be following what’s happening here. I still like the idea of having some modest percentage exposure to the main players, bitcoin and ether. Keep your position size small to ride out the volatlity.

Explore the rest of the cryptos for a potential punt on a big payoff.

Best wishes,

Callum Newman
Editor, The Daily Reckoning Australia