Invest in Cryptos at Your Own Risk

Apr 29, 2021

Just when life started to crawl back to normalcy, we got hit by a massive surge in covid cases.

While fear was very high last year in April-June 2020, the number of cases were relatively lower than this time.

Looking at the current scenario, it would be a gross understatement to call the current surge as a wave.

The word you are looking for is Tsunami.

On a lighter note, amid the gloom everywhere, most of you in the previous lockdown would have gained some inches.

I certainly have.

So to avoid the repeat of last time, I started exercising on my building terrace.

Few days ago, I spotted a gentleman from my building, also trying to lose some calories. After a few casual greetings, we started chatting (with our masks on) about the stock market.

My neighbor is a garment manufacturer by profession. He does private labelling for marquee T shirt brands and kids wear in India.

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His business has been hit due to the second Tsunami of cases and the consequent supply and demand disruption.

I expected a discussion on inventory loss, temporary factory closure or may be his reading of the revival of demand in the textile sector.

The analyst I am, I was hoping to get a ground check on a few textile companies.

However, the conversation started with stock market and the most common question 'Kya lagta hain market' and then shifted instantly to bitcoin.

Now that's very unusual.

He boasted about all the money he made trading bitcoin, ethereum, and also the new-found love dodge coin. I was stunned.

My analytical mind wanted to probe further.

So, the narrative started with his brother-in-law, an American citizen introducing him to crypto currency.

What was astonishing is that he had no idea about block chain technology or even concepts on which crypto currency is based, such as mining.

The only thing he was glued to was the price.

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The profit on bitcoin he made in a month was more than 2-3 years of returns in a small cap stock. The first question which came to me was, 'Am I looking at the wrong market'?

As they say in the market, 'Bhav Bhagwan Che'.

Now that's dangerous from a perspective of a fundamental analyst like me, who believes in research and trends.

There is always going to be a never-ending debate on cryptos. Is it an investment or a speculative asset or may be as a future of payment technology?

So as a fundamental analyst, I gave him a perspective of the madness in the crypto market.

Some food for thought.

How is crypto an investment or a store of value, if the price multiplies by 8 times or 724% in a matter of 26 days?

Yes, I am talking about dogecoin. The new-found love among the crypto speculators.

Even if you equate it to speculation, it's practically impossible for a retail trader sitting in Mumbai to figure out when the music stops.

In our experience, the music in such cases, usually stops abruptly. We all know how the GameStop saga ended.

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As an analyst, one has the tools and information to research on a particular company on various parameters - demand, supply, competition, raw material/sales pricing.

On putting these numbers in to perspective in valuation methods, one can come to an informed opinion.

How do we value crypto currency? What are the fundamental factors driving the price?

Let us look at a recent crypto news from Turkey...

  • 'Turkish crypto exchange boss goes missing, reportedly taking US$ 2 billion of investors' funds with him.'

Doesn't this headline scare you if your money is in cryptos?

To add to it, one more crypto currency exchange in Turkey by the name of Vebitcoin, ceased operations as recently as yesterday.

In the last 20 years, countries wanting to assert dominance, fought wars on geo-political issues or as recently, trade protectionism.

Things are about to change in my opinion.

I believe, economic dependence in the next 2 decades would be asserted by currency and technological wars.

We all know how China controls its currency. On the technology, front semiconductors and 5G technology news are dominating the world these days.

Central banks would like to use currency as a tool to win economic wars. A country is as strong as its currency.

After all, we all know in terms of crisis, money moves to safe havens like the yellow metal gold, and the dollar.

In that context, wouldn't central banks regulate crypto currencies?

To sum it up, cryptos as a part of the bigger block chain technology may be worth exploring.

However the magnitude and intensity of price fluctuation, makes it a purely a trading tool with a regulatory overhang.

With increased participation in the financial markets, as is evident from the crypto speculation done by my neighbor, the scope to channelise funds via investments in equity market, is tremendous.

The increasing trend towards equity market participation by channelising household savings coupled with rising disposable incomes gives us a good opportunity to discover quality small cap stocks in the value chain, all the way from stock exchanges to AMCs.

We have identified an undervalued high quality small cap stock in the financial sector. The beauty of the company is that the value of cash and investments on its balance sheet is more than 50% of its market capitalisation.

More to come...

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

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