What You Should Know When Investing in Crypto and Pot Stocks

15% a year…pish. Why not go after the 10-baggers that erupt in months?

I’m guessing this is how most millennials think about investing. That’s what the mainstream media tells you at least. After all, they’re the ones buying cryptocurrencies and cannabis stocks, according to Businessweek.

I’m sure some millennials like a boring 15% per year (if you can call that boring). But a good story and the promise of overnight success is sometimes too hard to ignore.

You saw this happen in the crypto world late last year. Promoters promised bitcoin would be the next big thing (it still could be). They added a narrative of toppling greedy financial middle men and BAM…within a few months EVERYONE wanted bitcoin.

If you remember, the price was lighter than air.

Chinese bans were no big deal. Bitcoin quickly rebounded after exchange breaches. Even crypto haters like Jamie Dimon and Warren Buffett couldn’t quell enthusiasm.

Then came the spook. Like a herd of horses, all it took was a few sellers to make everyone turn and run. And here we sit, with bitcoin at US$6,533.

 

A delayed gratification problem

Nobody wants to get rich slowly. Not millennials, not generation X, not even baby boomers. It’s why there was so much demand for bitcoin last year.

It’s also why a good chunk of investors are so interested in cannabis stocks now. You’ve probably heard the Tilray Inc. [NASDAQ:TLRY] story: a tiny cannabis stock that’s paid off handsomely for early investors.

Problem is Tilray wasn’t making money, before, during or after its stock rocketed to the moon. In fact, there is so much uncertainty surrounding future earnings it’s hard to reason how the stock once reached a market cap of US$20 billion.

At such a price tag, Tilray eclipsed names like Tiffany & Co. [NYSE:TIF]Campbell Soup Company [NYSE:CPB]and even American Airlines Group Inc. [NASDAQ:AAL].

Tilray market value

Source: Bloomberg

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The main reason why Tilray was one of the few stocks to show such substantial returns in the last few weeks was due to the fact that it was the only viable option for US and international private and institutional investors to directly invest in the Canadian cannabis market that had become volatile recently, as the Trudeau government managed to deliver on its promises and with the support of the House and the Senate made the use of cannabis legal,’ Bears of Wall Street wrote on Tuesday.

If I had to guess, I’d say cannabis stock will stay hot until we know a bit more about market demand. As a result, ‘…there’s no doubt we’ll see a wave of IPOs,’ Businessweekwrote. It will be much like the thousands of initial coin offerings (ICOs) we’ve seen over the last two years.

While numbers have been declining, 2018 has already seen more than a thousand ICOs. Most of which, I imagine, are young entrepreneurs with dollar signs in mind.

ICOS funds raised in 2018

Source: ICO data

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Plus, we’ll see opportunistic pivots — press releases from companies saying, “Hey! We’re a cannabis company now.” You almost feel sorry for (the former) Long Island Ice Tea Corp., which bizarrely pivoted to blockchain at the peak of the crypto hype last December,’ Businessweek added.

I must admit. I share many of Businessweek’s views. For the most part, people buying cryptos and cannabis stocks are the purest speculators. They see an ever rising price and hope irrational buying continues.

You shouldn’t dismiss cryptos or cannabis though. If we focus on the former, I would go as far to say it’s one of the greatest financial innovations of our time.

Sure, prices are way down. Crypto haters are using this as ‘evidence’ to pat themselves on the back. But this is not a get rich quick scheme. The value in cryptos is their potential to saving trillions of dollars’ worth of fees.

A situation that immediately comes to mind is money transfer. Right now, I can transfer you bitcoin and pay no transaction fee. That’s if you don’t count the fee miners take for validating and etching our transaction into the blockchain as a transaction fee.

What might worry you however, is the volatility of bitcoin. While I could transfer you $500 worth of bitcoin, the purchasing power of the coin could drop 10% tomorrow. It’s this uncertainty that holds back savers and investors from using cryptos to transact.

If we had a stable crypto it might be a different story. Some say we already have such a crypto: stablecoins. In Wednesday’s Money Morning however, I pointed out that not everyone is convinced of their application.

 

Defying human nature

I guess the point I’m trying to make is to keep your wits.

There’s nothing wrong with jumping into cryptos or cannabis stocks. Just don’t count on being that lucky one that wins it big.

Of course, it’s easier said than done. It’s human nature to look for easy wins (or what seems like it) and immediate gratification.

Just don’t bet the house while you’re at it.

Your friend,

Harje Ronngard


Harje Ronngard is one of the editors at Money Morning New Zealand. With an academic background in finance and investments, Harje knows how difficult investing is. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. There are two questions Harje likes to ask of any investment. What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Money Morning New Zealand readers.


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