Showing posts with label Speculation. Show all posts
Showing posts with label Speculation. Show all posts

Wednesday, May 31, 2017

Thoughts about Bitcoin

I've recently started a Facebook group for this blog where members are encouraged to ask any question about money. Out of the blue, one member asked about Bitcoin. In an effort not to monopolize the forum, I waited several hours. But nobody was keen on answering the question.

I eventually end up writing a brief but very informative answer only to see the post mysteriously deleted (ugh!). I'm writing this to preserve what I wrote and to expound on the topic a bit while the upfront research is still fresh in my mind.

I'm no crypto-currency expert and never owned Bitcoins, but I'm probably more qualified to write about the technological aspects of Bitcoin than most bloggers out there given my experience:

  • spent almost 20 of my working years developing a Foreign Exchange trading system
  • led the development of an FX order management system used by broker dealers
  • implemented a web-based payment system used by various regional banks
  • architected my company's web security infrastructure.

In other words, I used to eat currencies, payments and digital certificates for breakfast. However, I'm going to spare you from hearing about the technical intricacies, so you don't fall asleep.

Without further ado:

What is Bitcoin?

Bitcoin is a type of digital currency with a built-in payment network. The exchange rate as of this writing is $2,236.02 per BTC or Bitcoin currency. As recent as one year ago, it was worth about $500 apiece. That's more than 400% return!

Hold your horses, before you invest speculate. I wouldn't recommend anyone to invest in Bitcoin because of the wild swings in prices. There are legal and regulatory issues that need to be addressed that affects its volatility. 

For one thing, Bitcoin is not legal tender. It's  not recognized by law as a medium of payment that can meet a financial obligation. This means that you cannot require your landlord to accept your Bitcoins as late payment for your rent-- he can still legally kick you out so you fall flat on your face.

Should you do decide to gamble, make sure it's a small portion of your portfolio or be prepared to lose your shirt (along with your underwear).

The idea behind Bitcoin is that there's no central regulatory bank that can control the supply of money. Governments like that of China or the U.S., for example, can simply print money to devalue its currency to make exports more competitive-- which often causes inflation. Not so with Bitcoin, there's a special algorithm to prevent that from happening.

Just like gold, Bitcoins can be mined albeit electronically-- anyone with specialized equipment, software and knowhow can become a miner. The mining process involves the use of high-powered computers to solve mathematical puzzles as controlled by a special algorithm. Miners are issued a certain number of Bitcoins in exchange for the work done. It is this same process of solving mathematical problems that make the payment network more stable and secure.

Bitcoin peer-to-peer network

The Napster of money

Do you remember Napster? It was the music service that first popularized peer-to-peer file sharing protocol. Between 1999 and 2001, pretty much anyone can download MP3 music files for free. And millions did so, including myself who acted like a kid in a 24-7 candy store. The fun didn't last a long time as it was eventually shutdown after the company was sued by Metallica and Dr. Dre.

Unlike traditional client-server network architecture, peer-to-peer networks don't use centralized servers to host the resources. Instead, pretty much any node in the network can allocate resources to other nodes. For Bitcoin, there are many advantages to this setup, among them:
  • no central point of failure
  • no third-party involvement
  • minimal transaction fees.
It's no surprise that this is the network architecture of choice for Bitcoin given its decentralized nature. This means that a merchant in the U.S. doesn't have to deal with a shady bank in Somalia to accept payments from Somalis. No third-party involvement means that the transaction can occur instantaneously with minimal transaction fees.

Built-in payment network

What makes Bitcoin revolutionary is that it's both a currency and a payment network. Never in the history of mankind had a currency been interwoven with a payment network. A dollar or a peso is a currency, but neither are payment networks. Paypal and Visa are both payment networks, but neither are currencies.

Software that runs Bitcoin protocol is called a wallet (you can download an app for your smartphone). It allows the holder to move Bitcoins from one wallet to another instantaneously without the involvement of a third party. This essentially makes users to effectively become their own bank.

Other interesting facts

Bitcoin was supposedly designed by a certain Satoshi Nakamoto-- a man born on 5 April 1975 (which coincides with my wife's birthday).  Many believe this is just a pseudonym for a person or group of people who developed the protocol.

Bitcoin protocol is open source. Much like Wikipedia, anyone can view and modify the code. Subject to review by a panel of people, of course.

The first Bitcoin transaction was made in 2010. Somebody from the U.K. purchased 2 Papa John's pizzas for 10,000 BTC. If that person kept the coins, it would have been worth around $22,000,000 today!

Would you invest in Bitcoin? Please comment below.
Want to learn more about Bitcoin? Here's a very good book that I recommend.

Monday, March 6, 2017

Aw, Snap! (I should not have bought the stock)

Buy what you know, and stick to companies with good long-term
prospects and quality management-- are 3 well-known rules that the famous investor, Warren Buffett, follow when buying stocks.

None of these rules I followed when I bought 200 shares of SNAP when it went public last week.

The purchase was done on impulse. Risky move indeed, but it is risk that I can afford to take.

I bought what I barely knew

I sort of knew what SNAP is. It is the parent company of Snapchat-- famous for its disappearing messages. Across the country, millions of teenagers and millennials have been using the app to share intimate and sometimes indecent selfies. It's the killer app that could have saved Anthony Weiner's career-- if only he knew about it.

I'm no active Snapchat user, but I do try to login to my account (I go by the username of M Solve) every now and then. The only reason why I have yet to send a message is because I don't know anyone there. Most of my friends are either on Facebook or Instagram.

Being an older Generation X'er, I simply don't belong to the age group (I still do get a lot of compliments that I look very young for my age though).

What's interesting for me is that the company's 26 year old co-founder and the CTO, Bobby Murphy, is part Filipino. He's now worth a cool $5.6 billion dollars. His mother grew up in the Philippines before emigrating to the USA. This is probably what intrigued my interest to watch the stock.

Valuation, what valuation?

Everybody knows that buying stocks is the same as buying a piece of a business. When you're buying the coffee shop across the street, the first thing that you ask is "What's the bottom line?". Let's say the store's net profit is $10,000 per year, after all the employee salaries and other expenses are paid. If the owner is selling the business at $100,000, the Price-Earnings (or the P/E ratio) is 10.

The P/E ratio is probably the most important metric that professionals use (and misuse) when buying or selling stocks. In general, a low P/E can indicate that the company may currently be undervalued. Either that or the company is doing very well relative to its past trends.

In the case of Snap, there is no P/E ratio...

Companies that are losing money do not have a P/E ratio.

In fact, the company has incurred a net lost of $514.6 million in 2016 and $306.6 million in 2015, according to its SEC filing in February.

An alternative would be to use the Price-Sales metric by using revenues instead of earnings. But even then, valuation in Snap's case is not relevant, according to the "Mad Money" host, Jim Cramer. You simply cannot value the stock when only 200 million out of the 1.2 billion shares are publicly traded.

What's pushing the price is the stock's "hotness" factor.

Why then did I buy the stock?

It's pure speculation, I do not plan to hold the stock for a long time.

I seldom buy individual stocks, it's risky. The ones that I'm currently holding, I've held for a very long time. I'm fortunate that I've profited from them, through dividends and asset appreciation.

Snap will be the exception to the rule. For growth stocks like Snap, expect potential dividend money to be reinvested back to the business. Capital appreciation is what I'm hoping to get.

You see, there's nothing wrong with doing a little speculation ;)

I bought the stock with money that I can afford to lose.

$5,000 is money that I can afford to lose. That's the most that I could lose, but the probability that I'd lose all that in a year or two is close to nil.

I figured that if the stock loses 2/3 of its value then that will be comparable to me spending $3,348 to travel to Manila to attend my high school reunion. And since I didn't actually go, any loss that I might incur due to this trade will still be within my budget.

Let's wait and see.