Will Bitcoins Put Paper Money to Shame? - The 5 Minute WrapUp by Equitymaster
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Will Bitcoins Put Paper Money to Shame?

Jan 11, 2018

Tanushree Banerjee, Editor, The 5 Minute Wrapup

The global financial crisis in 2008-09 had a lot of repercussions. Economies collapsed, some governments verged on bankruptcy, and many companies had to be bailed out.

Banks, of course, were hit the hardest, because ultimately that is where the crisis originated. Fancy derivatives, greed, fat bonuses...all propelled bankers to take unprecedented risks culminating in the bubble bursting.

Clearly, the banking system was not to be trusted. Even the central banks came under fire - for not only bailing out institutions that were better off failing in the first place, but for creating money out of thin air. This led to a massive surge in liquidity, and interest rates close to zero, without really kickstarting growth in any real way.

For many, the global banking system was in ashes and the central banks in particular were the real enemy. They could not be trusted. In fact, we wondered, does paper money have any value anymore?

And amid these ashes, the bitcoin rose like a phoenix.

In 2008, a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System, appeared online via the Cryptography mailing list. This was authored by Satoshi Nakamoto, a person whose identity has not yet been confirmed. The first software version of Bitcoin client was released in 2009.

The basic idea was to create virtual money, free from any central monetary controls, and peer-to-peer based.

It probably did not catch the fancy of many at the time. But 2017 has been a completely different story altogether.

An article in the Indian Express highlighted how Google's 'Year in Search' report for 2017 showed 'How to buy Bitcoin in India' and 'What is Bitcoin' to be among the year's top queries.

Whether bitcoin is a fad or here to stay, only time will tell.

Indeed, a lot of people are still skeptical about the currency's future. Our own government and the central bank certainly don't like Bitcoins.

And yet, it would probably not be wise to dismiss bitcoins and the blockchain industry entirely.

At least, not without understanding the mechanisms that make cryptocurrencies and blockchain work in the first place.

As is the case globally, there is tremendous interest in bitcoins in India as well. And the good news is that expertise is at hand to help you navigate the seemingly complex world of cryptocurrencies.

Prasheel Vartak and his guru Tama Churchouse, who have been researching cryptos for years, are on a mission to educate Indian investors about this fascinating investment. To make sure you're not left behind in the bitcoin movement, join them here.

And remember, whatever you do, stay informed.

Editor's Note: Don't move a bitcoin muscle before you've understood this.

Another Ratio Indicating Market at Its Peak

Previously, we wrote about the market capitalization to GDP ratio. This ratio indicated valuations reaching its peak levels. There is one more ratio, which is an important indicator for equity markets. The earnings yield vis-a-vis 10-year bond yield.

Earnings yield is calculated as the net profit for the trailing 12-month period, divided by market capitalization (inverse of PE Ratio).

A high earnings yield indicates that the market is assuming a lower growth in profits in the future for the company.

A low earnings yield indicates that the company is expected to have high profit growth for an extended period of time.

This ratio can be used to evaluate the valuations and compare how cheap or expensive the stock market is relative to the debt market. A comparison of the yield between the two capital instruments, equity and debt, can be used to assess the risk-reward for investing.

This tool has been a very important indicator to identify the bottom of the equity market. Whenever the earnings yield has crossed bond yields, it implies that even assuming nil earnings growth in perpetuity equity will deliver better returns than debt. Similarly, when equity yields are lower than bond yields, it indicates that equities are expensive than bonds.

Increasing Divergence Between Bond Yields and Earnings Yield

From the data revealed in the chart above, we can observe that lately the divergence between bond yields and earnings yield has increased. This means equity markets have become expensive. The sharp rally was due to huge inflows from domestic institutional investors (DIIs) and foreign institutional investors (FIIs). Also, compared to equity, debt has become significantly cheaper.

Increasing divergence is unsustainable and earnings yield should rise driven by an increase in corporate earnings. Otherwise, the correction could be on the cards.

Crude Oil Rises Above US$68, Highest Since May 2015

Brent crude futures, the international benchmark for oil prices, touched US$68 on Tuesday. This is on the back of production cuts led by the OPEC and expectations that the US crude inventories had dropped to an eight-week low.

The market already saw a tightening supply due to the OPEC-led production cuts. The OPEC is expected to extend a cut of approximately 1.8 million barrels per day through 2018.

The rising oil price is not good news from India's perspective. For India, it may mean a deteriorating current account deficit.

Similarly, since fuel prices are not regulated anymore, oil marketing companies do a daily revision of petrol and diesel prices, in tandem with international rates.

This will impact inflation. This pressurises the monetary policy. And, if crude oil prices remain high, there will be a change in the trade dynamics affecting the trade deficit, which in turn will influence the direction of the rupee's movement that's presently quite strong.

What the Markets Looked Like Today

Indian equity markets opened the day in the red. At the time of writing, BSE Sensex was trading lower by 15 points and NSE-Nifty was lower by 10 points. Both the mid cap and small cap indices are trading up by 0.4% and 0.6%, respectively. Stocks from the consumer durable and realty are among the few gainers.

Investment Mantra of the Day

"If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes." - Warren Buffett

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