Bitcoin had another giddy plunge in mid September. The cause, this time, was again Chinese regulators who first banned the “initial coin offerings” that produced a flood of digital currencies, and then began shutting down the exchanges where bitcoin and other crypto currencies are bought and sold.
The fear was that if bitcoin trading in China stopped, a pillar of demand and liquidity would be removed from the market and bitcoin would collapse.
Back To Its Highs
As it happened, the losses were rapidly recouped and bitcoin is once again moving toward its previous high of $5,000. Bitcoin enthusiast, former Libertarian presidential candidate and all-around madman John McAfee said simply, “How do you stop something that can’t be stopped?” Indeed, many observers see China’s draconian action as a test case – if bitcoin trading survives in China, it will demonstrate that the currency is effectively ineradicable. Governments won’t be able to stop it; they’ll simply have to come to peace with it and do their best to regulate it. While some bitcoin trading will certainly occur beyond their knowledge, a great deal of it will eventually be conducted on legitimate, above-board, regulated exchanges. Most importantly, as far as the government is concerned, taxes will be paid.
Bitcoin may yet succumb to some other digital currency with technical superiority, but for now, nothing has been able to challenge its dominance. In the wake of China’s actions, trading rapidly shifted to Japan and South Korea. If Chinese miners are shut down, network power will simply migrate elsewhere and miners in other parts of the world will rejoice for a little while. Thus far, the network is proving very resilient, which is, of course, what it was designed for.
Investment Implications
Bitcoin is a rational speculation for those with high risk tolerance. The risk of total loss is real; the risk of gains is also very real. We do not recommend digital currency speculation to anyone who is not comfortable with the risk of total loss of capital. We recommend that those who wish to speculate in bitcoin do so only on recognized, regulated exchanges in the United States. With the CBOE planning to launch bitcoin futures trading, some impediments that stood in the way of bitcoin ETFs may be removed. The arrival of bitcoin exchange-traded products could result in a massive movement of funds into the cryptocurrency, and this is a development that speculators should watch closely.
Our Outlook
U.S. Equities
Although we warned of a seasonal pattern of market corrections in September, none has appeared, and here we are in early October. We remain bullish and continue to suggest buying dips if any occur. We remain positive on U.S. equities and on the same sectors that have prospered in the recent past. Internet related tech, biotech, video games, social media, travel-related (such as cruise lines), and semiconductors are our favorites.
Emerging Markets
EMs continue to maintain a high status in our eyes. We especially like China, Taiwan, Singapore, Hong Kong, Japan and South Korea. Within the region we favor video gaming technology, internet giants (Alibaba (NYSE:BABA), Tencent (OTC:TCEHY) and YY.com (NASDAQ:YY), social media, short-video internet, insurance companies and travel-related.
Gold
Gold remains in a corrective phase. If gold approaches $1300/ounce, a close above $1295 might be a good time to re-enter gold.
Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s principals and clients own BABA and YY. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.