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“The stock market is a device for transferring money from the impatient to the patient.”

— Warren Buffett

Should investors be patient with crypto?

The equities portion of my investment portfolio is always fully invested, which means I don't have any spare cash to buy the dip when stocks go down.

Nonetheless, I kind of like it when they do.

Mostly that’s because market selloffs are an opportunity for companies to create incremental value by buying back shares — and share buybacks executed at lower prices create more value for shareholders than share buybacks executed at higher prices do. 

Most of the stocks I own generate a good amount of free cash flow, so I’m happy when they have a chance to buy their shares back at lower prices.

Counterintuitively, that means when the prices of my stocks go down, the value of my stocks go up.

This is always welcome, of course, but an additional benefit of market selloffs like the one we’re currently having is that the combination of lower prices and higher value makes it easier to not sell.

This is important because not selling is the real trick to long-term investing: The way to get rich (slowly) is time in the market and the way to get poor (quickly) is timing the market.

For all of the seemingly crazy moves they have, markets are far too efficient to be timed.

Market selloffs are also useful as a conviction check.

If you can't remember why you liked a stock when it was higher, you should probably sell it now that it’s lower — and replace it with something you’ll have more conviction in the next time the market decides to test our patience.

The key word in all the above is “market:” The best kind of selloffs are the ones where the market is down for market reasons, not economic/fundamental ones.

Without the benefit of hindsight, it’s impossible to know which kind this one is, but a sharp, seemingly out-of-the blue selloff is usually indicative of position unwinding — selloffs driven by fundamentals tend to unravel more slowly than that. 

For longer-term investors in equities then, the sharp, seemingly out-of-the-blue selloff we experienced Monday is probably good news.

Now let’s do crypto.

The uncertainty principle 

Unlike stocks, most crypto tokens don’t have the automatic stabilizer of getting cheaper when prices go down.

Ethereum’s revenue, for example, is earned in its native token, ETH — so when ETH fell 25% on Sunday, the dollar-value of Ethereum’s revenue fell 25% as well.

On any dollar-based valuation metric like price-to-earnings or dividend yield, lower prices have not made ETH any cheaper than it was (nor will it get more expensive if it goes back up). 

At this early stage of its development, crypto does not have the automatic stabilizer of share buybacks either, because most crypto protocols are perpetually raising capital by selling tokens into the market. 

Lower token prices mean that these protocols will have to issue more tokens to raise the same amount of dollars.

In that sense, lower crypto prices means lower value, too — an automatic destabilizer.

More helpfully, lower crypto prices do at least provide the same conviction test that they do in equities.

For me, though, the failure rate is much higher — I always find it harder to remember why I own a crypto token when it's going down than I do a stock.

Mostly that's because my primary reason for buying any given crypto is that someone told me it would go up.

I unfortunately have a lot of company in that as most crypto investors seem to be overly focused on prices.

I think that's partly a legacy of Bitcoin (the sole purpose of which often seems to be number-go-up) but also partly because it's much harder to determine the value of a crypto token than it is the value of a stock.

Worse yet, most people can't even agree why crypto tokens might have value, let alone what the value should be.

Is bitcoin digital gold or the future of finance? Is ETH money or a productive asset? Are governance tokens claims on earnings or just voting rights?

The current uncertainty in equities is about where we are in the cycle.

The perpetual uncertainty in crypto is about what these things even are.

If you're a true believer, that is for the best: Other people's uncertainty is your opportunity.

There's a lot of uncertainty in crypto investing, so there should in theory be a lot of opportunity, too.

If you're not a true believer though, it will be hard to hold on long enough to find out.

Testing times

Monday’s 12% crash in Japanese stocks is widely being compared to the 22% Black Monday crash of 1987.

That may sound alarmist, but I think it’s a useful comparison — mostly because, 35 years after the fact, we still can’t say for sure what caused the biggest ever single-day drawdown in US stocks.

Here’s what Franklin Edwards, the author of a 3,000 page compendium of economic papers studying the 1987 crash, had to say on what caused it: “The bottom line is that no one knows.”

Monday’s one-day crash in Japan is more easily attributable: the Bank of Japan’s surprise rate hike led to a mass unwinding of the dreaded “carry trade.”

But why that should make US equities or borderless crypto go down is equally as mysterious as why stocks fell 22% in a single day in 1987. 

Yes, the carry trade unwind could be a rare instance of a market malfunction that spills over into the real economy, thereby lowering not just the price, but also the value of risk assets.

Chances are, though, it'll prove to be just another mysterious but helpful test of both your patience as an investor and your conviction in your investments.

But if lower crypto prices are already testing your patience, you may want to rethink your conviction in them.

— Byron Gilliam

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