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Looks like we are back in the green again. Perhaps that means we can read today’s newsletter in relative peace. Sit back, relax and join us for:
Market News & Analysis
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📈 So… Are we Good?
BTC is back above $30k again. The near 10% price drop on Tuesday was typical of a shakeout (a period of market turmoil where sellers capitulate). Buyers quickly stepped in as oversold conditions appeared on intraday charts and $715 million worth of Bitcoin shorts closed on Bitfinex 👇
Alas we have seemingly re-entered the ‘wait-and-see’ broad range of $30k to $40k established in the aftermath of the mid-May sell-off. It looks like the market has digested most of the negative news of the last week. Including but not limited to the Federal Reserve’s unexpected hawkish tilt on interest rates and the People’s Bank of China reiterating its crypto banking ban.
If price action is going to be reminiscent of the last few weeks, we’ll likely continue to see consolidation for some time. Unless we are graced with another bearish China headline that is. It is also worth noting that Bitcoin options worth more than $2 billion are set to expire on Friday. The monthly expires have gained prominence this year as volatility inducing events.
🏠 Rental Property Investing: Part 2
In Part 1 of our Rental Property Investing series we covered:
The advantages of rental property investing
The 4 ways to profit
How to find good deals
How to create a rental property investing approach
Today’s focus will be on the disadvantages of rental property investing. There will always be disadvantages. To every type of investment. If anyone tells you differently, don’t listen to them. They’re likely trying to sell you something. After we discuss disadvantages, we’ll conclude with the Market Meditations approach to rental property investing.
☠️ Disadvantages of Rental Property Investing
1️⃣ Building Wealth Through Rental Property Investing Takes Time & Money. This is not a get rich quick scheme. Becoming rich through rental property investing requires that you take consistent action over a long period of time. Whilst you can purchase crypto with a minimal cash outlay, real estate investing requires money. To get started, you’ll need to place a deposit, repair the property and pay mortgage payments.
2️⃣ It May Become All Consuming. Like many other passions, there is a risk that your rental properties will be the only thing you can think about. Particularly if you have a mortgage, this can become a strain on your life and freedom. You have committed to significant monthly payments for a long period of time. Quitting a stable job for a dream job, or moving countries, or any other decision that may impact your finances becomes much more difficult.
3️⃣ Active Management Requirements. Unlike crypto and stocks, properties require active management. They need to be periodically maintained, refurbished and tenants need to be managed. This costs both time and money. From unforeseen repair costs to tenants failing to pay rent or simply moving out, leaving the property without cashflow, property can be a risky business.
4️⃣ It Involves Paperwork and Bookkeeping. Much like any other business but the point is if you hate this type of work, you’ll need to consider the cost of outsourcing it to someone else.
5️⃣ You Can Lose Your Investment & The Market is Illiquid. Just like in any other investing activity, returns are not guaranteed. Whilst you can increase your odds of succeeding, you can’t guarantee it. Real estate investors deal with fluctuating demographics and volatile economies, which can either add or take away from bottom-line profits. Real estate also has low liquidity. Many investments are highly liquid (can be bought and sold for a profit in a fraction of a second). Real estate investments are comparably illiquid: properties can’t be quickly and easily sold without a substantial loss in value. You're buying a tangible asset that you can’t liquidate for cash if you need emergency funds.
💎 The Market Meditations Approach
It comes down to trade-offs. This is an asset class that can yield decent returns, is relatively accessible (cheap leverage) and can act as an inflation hedge. At the same time, it requires a great deal of money, time and is relatively illiquid.
The benefits of rental property investing suggest it does have some role to play in our overall portfolios. It could be an attractive 10-20% allocation, for instance. The problem is that rental property investing is very cash intensive. Suppose a deposit costs $60,000. You’ll require about $600,000 in investing capital for a 10% allocation to rental property investing. For most people, a mortgage (and the other associated rental property investment costs) takes up the lion’s share of their investing capital. Meaning they are heavily overexposed to just one asset class and they pay a significant opportunity cost. They will forgo the opportunity to invest in: stocks, bonds, crypto, commodities and more.
What if there were methods to get a smaller exposure to rental property and real estate? Fortunately, there are. A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves. Suddenly, a much smaller allocation becomes possible.
The table below is taken from A Random Walk Down Wall Street and provides information on some REITs:
Source: A Random Walk Down Wall Street
And thus concludes today’s Market Meditation. Every investment decision comes back to you, as an individual. What are your goals? What are you aiming for? How quickly are you looking to get there? How much are you willing to risk? How much time can you invest? These are but a few variables that add another dimension to investment decisions. Know yourself before you try any of these things. That is critical for success and without it, failure is likely.
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✈️ Crypto Miners: Next Flight to Kazakhstan?
Bitcoin hashrate (or the total computation power to mine the cryptocurrency) has declined by nearly 50% in over a month, according to The Block Research. Why?
The recent dip in price of BTC
Hashrate dropped significantly after the government of China last month moved to shut down bitcoin mining activity in some regions, including Xinjiang and Sichuan (these two regions alone are estimated to have about 30% of the total bitcoin hashrate).
Bitcoin miners have taken the hint and they have moved towards pragmatism. About 65% of the world’s bitcoin mining took place in China as of April 2020. It is now estimated that China has less than 50% share of the bitcoin hashrate. Foundry USA has seen its hashrate increase by about 15% during the same period. Once again, we see evidence that it takes more than one person or one country to stop the monumental force that is the crypto markets.
Besides the U.S., Kazakhstan, Russia, and Georgia appear to be attractive bitcoin mining destinations for Chinese miners. Earlier this week, China-based BIT Mining, formerly known as 500.com, already shipped some of its bitcoin mining equipment to Kazakhstan. The company is set to send more machines to the country next month.
🥸 Are You Overestimating Your Abilities?
In 1999 David Dunning and Justin Kruger carried out a test.1 They evaluated participants of their study on their logic, grammar and sense of humor. We can all learn from their findings, especially those trying to grow their wealth through investing and trading. The poorest performers all thought they were far more competent than their results showed. This phenomenon has become known as the Dunning and Kruger Effect.
When people possess little knowledge on a subject, they fail to recognize their mistakes and possible gaps within that knowledge. As their knowledge increases, they learn how much is required to fully comprehend a subject. Einstein experienced this effect himself, stating “The more I learn, the more I realize how much I don't know”.
The Dunning and Kruger Effect can have a devastating impact on our trading and investing, especially when combined with the effect of a parabolic bull market. A lack of knowledge may lead us to believe we understand trading and the results we may have seen over the past year prove it to us! This false sense of competence can lead us to make poor decisions and even more dangerous, to place larger bets - increasing our risk even further.
So what can you do to avoid it?
Find an external benchmark. To leverage trading as an example, check whether you have underperformed simply holding BTC or ETH. If so, it may be time to reassess your ability.
Adopt an attitude of continuous improvement. Always be looking for ways to gain more knowledge whether it be from the plethora of online resources or the experience of others.
Actively consider this phenomenon. If you catch yourself thinking you are the master of a topic, you should spend some time diving deeper.
The Dunning and Kruger effect can have a substantial impact on our losses in markets but can also be applied to all other areas of life. Always be willing to learn and remember if you think you know everything, you probably don’t.
Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.
Disclosure. Some of the links we’ve included are affiliate, they give you rewards and discounts and earn us a commission. Additionally, the Market Meditator writers hold crypto assets. See our investment disclosures here.
Kruger, J., & Dunning, D. (1999). Unskilled and unaware of it: how difficulties in recognizing one's own incompetence lead to inflated self-assessments. Journal of personality and social psychology, 77 6, 1121-34 .