Editor’s Note: We receive an immense amount of feedback from our hundreds of thousands of subscribers. But of late, one subject has dominated all the others: cryptocurrencies.
These are the mysterious, decentralized, private electronic currencies—like bitcoin—that dominate the financial technology headlines. But what seemed like fantasy just a few years back is now a reality that keeps the biggest names on Wall Street and in Washington up at night.
I turned to our resident cryptocurrency guru, Palm Beach Letter Editor Teeka Tiwari, for some “deep-dive” insight on this phenomenon…
J. Reeves, editor, The Palm Beach Daily: Teeka, you’re one of the first newsletter gurus to recommend specific cryptocurrencies to his subscribers. What exactly are cryptocurrencies, and why are they becoming such a hot commodity today?
Teeka Tiwari, editor, The Palm Beach Letter: Cryptocurrencies are an alternative form of money that cannot be diluted by a central authority.
The supply of new currency units is preprogrammed into the currency.
So something like quantitative easing—which is just a fancy word for money printing—can’t happen to a cryptocurrency.
And in many cases, cryptos can provide complete anonymity, something that only precious metals and diamonds have been able to do.
J.R.: What exactly is the “blockchain?” How does it work?
Teeka: The blockchain is the mechanism used to create and keep track of a cryptocurrency. Think of it like a bank ledger that records all transactions. Except this ledger is open for the whole world to see. (The ledger tracks the actual currency units, not the people making the transactions.) Changes can only be made to it if the majority agrees.
This open-ledger system keeps everyone honest… unlike the current banking system, which uses a “closed ledger.” Right now, we have to trust that the banks have the money they say they have.
We know for a fact that many banks lied about their financial health throughout the financial crisis. Citibank, in particular, had over $70 billion in liabilities that it failed to disclose. (What’s shocking about that is no one went to jail for those lies.)
This is where the blockchain can really change the world. By moving more financial transactions to an open-ledger format, we can drive out much of the fraud (and costs) that is in our current banking system.
Banks and brokers are testing the idea of moving all stock-trade settlements to a blockchain format. One report I read said this could shave $20 billion annually off current trade-settlement costs.
J.R.: Some of our subscribers have asked what they can buy with digital currencies. Can they buy groceries, for instance? Can you give us some examples?
Teeka: Sure. More than 100,000 merchants accept the world’s most popular cryptocurrency, bitcoin, as payment. This includes major retailers like Overstock, Costco, Walmart, Starbucks, and Microsoft.
It’s not just U.S. firms, either. The United Kingdom Gambling Commission recently approved bitcoin for online gaming. And a French bus company has become the first transit line in Europe to accept bitcoin. Cryptocurrencies are already a worldwide phenomenon.
J.R.: There have been several incidents of cryptocurrency hacks, thefts, and scams in the news. What gives you confidence that a certain cryptocurrency is safe?
Teeka: First, I will say this and then I will answer your question…
All money suffers from the same universal flaw: Everyone has to agree it has value. That’s true whether the money is in paper form or digital form. Cryptocurrencies aren’t perfect, but they are a huge improvement over paper money.
Paper money can be inflated away into worthlessness. Weimar Germany and modern-day Zimbabwe are two examples that come to mind. Our own currency—the American dollar—has lost 95% of its purchasing power since 1913. (Coincidentally, that was the founding year of the Federal Reserve, the U.S. central bank.)
So I would say that no currency is completely “safe.” They all have drawbacks.
What’s interesting about cryptos, though, is that no one has been able to hack the “ledger” (the blockchain).
And that’s important because it’s the sanctity of the blockchain that gives a cryptocurrency much of its value. The knowledge that no one can push a button and conjure up new currency units is an important feature of cryptocurrencies.
As to the hacks we’ve seen, they’ve been on currency exchanges and personal computers, not the blockchain.
The paper-money parallel would be a bank robbery or a home invasion…
If your bank gets robbed, the FDIC will make you whole. If your home gets robbed, your insurance company will cover most of your losses.
We don’t have that yet in the crypto world, but as the sector matures, I think you will see insurance companies stand ready to insure cryptocurrency exchanges.
Right now, it’s just too new for the insurance companies to step in.
J.R.: You’ve mentioned a particular cryptocurrency has the potential to unseat $300 billion titan Facebook. That sounds kind of like saying Mexican pesos could take down Walmart. How would that even work?
Teeka: Would it be any more “out there” than if I told you in 1998 that Amazon.com would have a 50% bigger market value than Walmart?
What if I said that a San Francisco startup barely 7 years old would threaten to put every cab company in America out of business? But isn’t that what Uber is doing right now?
How about the death of Blockbuster at the hands of Netflix?
The world is moving very quickly. There is no such thing as an ironclad competitive moat anymore. So yes, there is a very small cryptocurrency that has developed a social network using the blockchain and its own currency token that may one day dethrone Facebook.
I’m researching them now, and if it passes our due diligence, we’ll be writing about it in Palm Beach Confidential.
J.R.: Your cryptocurrency recommendations in the Palm Beach Letter portfolio have all seen gains up to 33.4%. Tell us a bit more about the next cryptocurrency recommendation your team is working on now. Who would this be appropriate for?
Teeka: There is a group of people that were very early adopters of bitcoin. They are known as the “bitcoin millionaires.” One of these bitcoin millionaires got into bitcoin at 2 cents. At that price, he was turning every $1,000 investment into more than $28 million.
I bring these guys up because I’ve found a very small cryptocurrency that the “bitcoin millionaires” are starting to buy. The price of the currency has been fluctuating between 2 cents and 4 cents. So it’s pretty close to where bitcoin was when they got in seven years ago.
These guys are buying in because of an impending event that they expect will blast the value of the currency much higher.
I’m in the process of doing my due diligence on this cryptocurrency right now. What I can tell you is that it’s very small and not very liquid. I won’t be able to write about this in The Palm Beach Letter; it’s just too small.
Tom and I consider this a classic “asymmetric trade.”
What that means is that it is an idea you can put a small amount of money in, and if it works as well as we think it can, you can make 20-100 times your money.
With that type of range of returns, you don’t have to put a lot of money into it. That’s the “asymmetric” part.
Your potential upside is so huge that you can risk a very small amount of money and still put yourself in a position to make tens of thousands… perhaps even hundreds of thousands of dollars in profits.
It’s very exciting. As I commented in a recent Palm Beach Confidential update, cryptocurrencies are one of the areas where you can still make absolute fortunes with just a small amount of money.
J.R.: What an extraordinary technology. Thanks for sharing your insights with us.
Teeka: You’re welcome.
Reeves’ Note: Cryptocurrencies are just one of the assets with astounding “asymmetric” return potential Teeka recommends inside Palm Beach Confidential. If—and only if—you have money available for speculation, learn more right here.