🌳 The crypto decision tree
November 02, 2021
The Gist
TOGETHER WITH

Happy Tuesday. According to Dynata & CNBC Select, what percent of investors check their investments’ performance once a day or more? a. 29%, b. 39%, c. 49%. Follow the 🌊 below for the answer. 

Today we cover:

  • The Gamestop files
  • How to qualify yourself to invest in crypto
  • Saving too much?

INVESTING

The Gamestop files

On October 19th, the SEC released their “Staff Report on Equity and Options Market Structure Conditions in Early 2021,” which we'll appropriately dub, the Gamestop files. 

The goal of this investigation was to get to the bottom of what caused such atypical volatility in the markets during this time. Gamestop was of course the primary target, but other meme stocks drawn in by this trend’s gravity were also under the microscope too.

The findings

  • It’s complicated: The Gamestop rally wasn’t only about being short-squeezed and watching hedge funds bleed. Data shows that the number of individual accounts trading $GME in January 2021 rose from 10,000 to 880,000 near the end of the month. Short interest played a role, but so did an 88x increase in volume. 
  • Trading restrictions: Robinhood was infamously villainized for their decision to briefly halt trading on stocks like $GME, as did other brokerage firms. In managing their risks associated with equity trading and margin calls, brokers reserve the right to decline orders or cancel trades. So when the NSCC, a national clearinghouse that works to guarantee trades before they're completed, asks Robinhood for a $3 billion dollar deposit as collateral to basically clear trades... you bet Robinhood will exercise that right. 
  • Gamestop was not alone: Although $GME is the face of this event with a 1600% surge in January, it was not acting alone. On Jan 27th for example, several other stocks experienced huge leaps from the opening bell to close. $KOSS jumped 480%, AMC 301%, $NAKD 252%, and $EXPR notched a 214% gain. 
  • Short-interest did contribute: As the report delineates, “In seeking to answer this question, staff observed that during some discrete periods, GME had sharp price increases concurrently with known major short-sellers covering their short positions after incurring significant losses. During these times, short-sellers covering their positions likely contributed to increases in GME’s price.

Other parting noteworthy impacts

  • Gamestop inflated some ETFs: GME did its own portfolio rebalancing with that price action. It went from a 1.5% allocation to almost 20% in the SPDR ETF $XRT, which experienced over $500 million in net redemptions on January 27th as a result. 
  • Short interest peak: Short-interest in $GME topped out on December 31st, 2020 at about 109% of the float, implying that more shares were shorted than were available to trade.

Our take. Regulatory scrutiny is just getting started as retail investors continue to make waves and bigger ones at that. We may see changes to stock settlement cycles, transparency around the execution of retail orders, the gamification of trading and more. Yes, the $GME frenzy was very much a story about retail investors taking on big hedge funds, but let's also not forget that institutional investors were also major players in the buying and selling here. 

CRYPTO

How to qualify yourself to invest in crypto

When it comes to cryptocurrencies, the perspectives investors tend to take on rests on a spectrum of sorts. On one end, you’ve got the measured, conservative approach that may be quite leery of this new asset class, and on the other, the YOLO, let’s take it to the moon camp. 

Neither of these outlooks are wrong per se, but perhaps there's a happy medium to be found. We should obviously try to understand the things we invest in, but to what extent? With something as intricate as crypto, how do we know if we’re ready?

Look at it as a spectrum

They say we should understand what we invest, but insofar as what? You might understand you’re buying shares of Apple, but how much do you know about the process of building a brand new Macbook? Do you know what the company’s quick ratio is, who their marketing director is, or any number of obscure facts about the business? 

As we can see, it’s very easy to take this too far. We don’t need to have in-depth knowledge of the inner workings of each and every company we invest in, because although it would be really impressive, it’s just impractical. Crypto can be viewed similarly.

The basics and the risk 

Cryptocurrency is different, in some ways vastly so, but also similar in terms of utility to the average investor. Its uniqueness comes with unique risks, and of course its own terminology too. So, let’s distill it down to a few essentials you should understand before investing in crypto.

  • Volatility: Stocks can be volatile, just read topic one. Crypto though, in most cases, is volatile. Reasons for this vary by coin, with Bitcoin’s volatility being due to a low float, concentrated holdings, and the fact that its intrinsic value is uncertain. For other coins, reasons may be similar or different, but the inherent volatility of an emerging asset is the same. 
  • Purpose: Each crypto project has its own goal, and the coins that coincide with them exist as incentive for the validators who support their decentralized system. You don’t need to understand every crypto’s mission statement, but at least get the gist of the one you want to invest in. 
  • Regulation: Crypto is an asset for now, and you will pay capital gains taxes on it if applicable. Outside of that, oversight and regulation are limited, but improving. 
  • Security: Crypto exchanges where coins can be bought often ensure your dollars on the platform, but not your crypto. So, there’s a slight risk you could lose your crypto in the event of a hack. This is the risk of keeping your coins in a hot wallet, and you should understand the difference between that and cold storage before investing.

If you’re still not sure about crypto, try this decision tree:

💡And if you haven't already, take this bite-size lesson on crypto basics:

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MONEY TIPS

Saving too much?

What do you mean, saving too much? How is that even possible? Saving profusely might’ve been a good idea before modern times, but now, opportunities to grow your extra money abound, and a savings account isn’t one of those opportunities. 

Saving money can be a great addiction to have, up to a certain point. In fact, you could even say it’s a good problem. It could certainly be worse. Nevertheless, being an olympic champion mattress stuffer isn’t likely going to make us wealthy, or prepare us for life post-career.

Here are a few signs you’re over-saving:

  • Your savings is overflowing: The definition of overflowing is subjective to your situation. The widely dispersed rule of thumb is to save 3-6 months of expenses, but what if that doesn’t feel like enough? A guideline with more leeway might be 6 months for dual-income households, and one year for singles. Whatever your number, if you’re past this point and still stacking Benjamins in the vault, you may be over-saving. 
  • You’re not contributing to retirement: If you’ve filled your emergency fund to the brim and you’re not shifting any of that towards retirement or investments, you might as well be diagnosed a chronic saver. Retirement investing is as important as saving, and a vital step toward preparing for the next stage of life no matter how far out it seems. 
  • You have analysis paralysis: If you’re financially stable with a fully-funded emergency fund and contributing to retirement with money left over and still finding yourself staring at the cart subtotal for those $80 shoes, it’s probably a sign you're an over-saver. Understanding your anxieties here can be helpful. 

📊 ASHU'S CORPORATE CORNER

Today's Movers & Shakers

  • Tesla (-4%) after Elon Musk said that it hasn’t yet signed an agreement with Hertz
  • Pfizer (4%) issued an improved outlook and beat on profit & revenue estimates
  • Under Armour (+9%) after beating consensus estimates and raising its full-year outlook
  • Generac (-5.5%) reported lower than expected revenues but beat the street's profit estimate
  • DuPont (-1.9%) cut full-year outlook citing deceleration in orders due to the global chip shortage
  • Estee Lauder (-1.9%) beat estimates but cut its annual sales outlook
  • Avis (+7%) on heavy demand for rental cars; it also beat earnings estimates
  • Simon Property Group (+4%) as revenues came ahead of estimates; the firm also reported 2x profit estimates
  • Clorox (+2.2%) posted better than expected earnings and revenues
  • Chegg (-31%), an education tech company, reported weak quarterly figures and missed on subscriber estimates

This commentary is as of 9:05 am EDT.

🌊 TRENDING ON FINNY & BEYOND

  • Answer: 49% of investors are checking their investments’ performance once a day or more. Here's why that's a problem  (CNBC Select)
  • 🌎 Climate change & COP26: What is it and why is it happening in Glasgow right now? (BBC)
  • Finny lesson of the day. As market volatility continues, let's go back to some basics. Take this 6-min digestible lesson for an insight or two on how to value stocks:

Finny is a personal finance education start-up on a mission to make your money work for you. We offer a personalized learning experience through bite-size, jargon-free lessons, money trends & insights and investing tools.

The Gist is Finny's twice a week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice. The editorial team: Austin PayneChihee Kim. Ashu's Corporate Corner is brought to you by Ashu Singh.

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