Coinbase: The new Tesla? And other big stock market questions answered

US stocks rose, pushing the S&P 500 to a record, as investors cheered encouraging data on the economy, a strong batch of corporate earnings and the prospect of as much as $1.8 trillion in new government spending. Investors have spent much of the month grappling with two competing dynamics: signs of a strong economic rebound, particularly in the US, and worsening Covid-19 cases elsewhere in the world that threaten to hamper the global recovery. Speaking to BizNews, to help make sense of developments for investors is US expert on stock market cycles is Dr Richard Smith, CEO of The Foundation for the Study of Cycles. He says Coinbase could easily become the Tesla of the cryptoworld and shares why there’s been a seismic shift in the digital world. He also weighs in on the S&P500, which has been powering up – and cautions that the risks of investing in US stocks now are very high. – Jackie Cameron

Dr Richard Smith on whether this will be a good year for US markets:

I think it’s probably going to be a good year, at least for another two months. I do have some concerns about the late summer and fall. The Federal Reserve continues to pump a lot of liquidity into the markets and that continues to override a lot of cycles that might otherwise manifest. But we also have the first year of a presidential cycle – which is oftentimes bullish – especially through the summer. Longer term, though, I do have structural concerns. There’s also, kind of, a 20 year cycle that oftentimes sees a significant dip in the first couple years of the every second decade.

You might remember what happened in the year 2000 with the dot-com bust. That’s got me a little edgy. The environment we’re in right now feels familiar to anybody who lived through the dot-com boom and bust. [There’s] a lot of speculation going on right now, a lot of crazy numbers in terms of sentiment, call-put option ratios and margin debt. It’s an exciting time in the markets, but I think it’s also a time of elevated risk. I think that we all have to be okay if we’re going to stay in the markets with a significant correction sometime in the next 12-18 months.

On what investors should be doing now:

I think it’s a tough time to be putting a lot of new money to work in the markets at these prices. Those of us who have been in the markets for a while, it’s very tough to time a market top. If it’s not broken, don’t fix it. Daniel Kahneman and Richard Thaler point out that we’re typically risk seeking with our losers. When we’re losing, we take more risk because we don’t want to sell – because selling means loss. We doubled down, triple down and turn a short-term trade into a long-term hold. Anything but take the loss.

But when we’re winning, the fact that we hate to lose attaches itself to our profits and we become anxious about losing our profits. Meanwhile, sometimes markets go nuts and we need to learn to be risk seeking with our winners. We need to learn to be risk averse with our losers and risk seeking with our winners.  Because markets are counterintuitive, normally, we are risk seeking with our losers and risk averse with our winners. I don’t want to say sell, even though I’m nervous about the markets [and] about the potential for a crash. I do think all of that adds up to saying that you have to be more vigilant right now. You have to stay on top of things a little better. You have to make sure you’re managing your risk. You have to be on the lookout for major cracks in the market that could turn into something more serious.

On his assessment of cryptocurrency:

I do think that cryptocurrencies are part of the speculative fever that is showing in a lot of areas of the markets right now. SPACs (special purpose acquisition companies) is a big one – crazy stuff going on in [that space]. There is serious speculation and a lot of new people in the markets who don’t really know what they’re doing and are investing with the herd. I do think that cryptocurrencies and blockchain are a serious technological revolution, on par with the internet itself twenty years ago. I really think that what you’re seeing is truly the creation of a digital economy.

The Internet – as it’s been so far – isn’t really a digital economy, in where people own and exchange digital assets for value. I call the Internet as it is today, television2.0. It’s real time television, is what it is. Facebook, Google and Apple [are] really monetising the ability to capture our attention and drive [it] to things that generate revenue for them – mostly ads. That’s really what the Internet has developed into over the past 20 years.  I think that blockchain and crypto, they have created digital scarcity. So you saw it first with Bitcoin, where you have the ability to say, “I control a Bitcoin. It’s mine, it’s not anybody else’s and I can prove it.”

That was really new. Now you have that with NFTs. These have been around for a while, but they’re starting to enter the public consciousness. Think about NFTs with regard to patents and intellectual property. I think crypto and blockchain are truly the basis of a new version of the Internet. I think we’re in the early stages of that. It’s really opening up digital property rights. I’m personally not entirely comfortable with a purely digital economy. I still love the analog side of life. I have some concerns about going to a purely digital economy – but that genie is out of the bottle. At this point, I think it’s more a matter of how do we structure it in a way that doesn’t consolidate power in the highly centralised institutions – including major corporations, multinationals and governments. 

On Coinbase:

I think Coinbase is great. I’m a big fan. They have 56m users and they’re profitable. That’s unbelievable. I think Coinbase is a great diversification play when it comes to the cryptocurrency space. I think they’re going to become the Spotify, Apple or Tesla of the crypto world. They have an incredible brand [and] incredible brand loyalty. Why couldn’t they take over the NFT market? I think they easily could. I think Coinbase has done a great job. I think it’s definitely a good diversification play for a lot of people that want to dip their toes in cryptocurrencies – in that new economy – that haven’t had a chance to do so yet.

It’s a lot easier to buy Coinbase stock than it is to go buy cryptocurrency, although it’s pretty easy to open up an account on Coinbase and buy yourself some Bitcoin. I think everybody should – just make sure you don’t do it with more money than you’re comfortable seeing fall 50%, 75% or 95% in the next year. It’s not out of the question – that happened to Amazon in the dot-com bust and look where Amazon is today. I think these things are long-term plays, but you have to have a 10-year frame of mind.

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