Chris DeMuth Jr., a portfolio manager at Rangeley Capital, writing in prominent investor portal Seeking Alpha, suggests investors optimize their cash holdings and put 10% of it in bitcoin.
Chris DeMuth, Jr.
DeMuth began his explanation with an overview of the current investing environment. He noted the stock market is very pricey.
Stock Market Pricey
The stock market price is currently about 119% of the GDP. The annual average total returns from that level is less than 1% historically. The cyclically adjusted price-to-earnings ratio is around 26, which is 58% higher than average, which is 92% as high as it’s ever been. The implied future annual return is negative, and the price-to-sales ratio globally is as high as ever.
The U.S. market is one of the most expensive in the world. It is also expensive relative to earnings, sales, book value, cash and dividend yield. The inexpensive markets, like Russia, have problems with their economic and political systems.
How Much Cash?
As for cash, the amount allocated to cash should probably somewhere between 20 and 30%. In “Preparing For A Market Collapse,” DeMuth argued for sizing discipline and a lot of cash. In “Contra Excess Cash,” he noted too much cash is a theoretical problem that rarely exists in practice. He did not say this out of pessimism about current opportunities as much as optimism about the future opportunities that will require more liquidity than the average counterparty.
There are not a lot of promising options, DeMuth noted.
Venezuela’s currency is so bad its printers are refusing to print it, while its neighbors at the bottom of the Index of Economic Freedom – Zimbabwe, Cuba and North Korea, – are similarly flawed. The countries at the top – mostly made up of ex-British city states in Asia, the Anglosphere, and some European countries – are not necessarily safe. Hence, it may make sense for American investors to diversify out of the U.S. dollar.
The dollar has been strong for the past few years compared to most other currencies. Individuals approaching retirement might find it sensible to diversify at least partially out of U.S. dollars, especially if they plan to spend much time travelling abroad.
Where Bitcoin Can Help
An allocation that helps diversify a cash portfolio is bitcoin, DeMuth noted. He bid in the last government auction for 30,000 BTC and will probably bid on the next one for 24,518 BTC if he can get them for a good price. (Ernst & Young is managing the auction for the Australian government on June 20.)
As for how much bitcoin one should buy, DeMuth thinks 10% of one’s cash portfolio or 2 to 3% of their overall portfolio is about right. “I would start with that and then allow it to grow over time with the increased acceptance of electronic currency,” he noted.
As to where to buy bitcoin, DeMuth suggested avoiding publicly traded trusts that trade at a discount. He called the Bitcoin Investment Trust “crazy.”
Coinbase is DeMuth’s bitcoin wallet. If the reader buys $100 of bitcoin or more on Coinbase, “we’ll each earn $10 of free bitcoin, so this is the ideal place to set up a wallet and buy a BTC or two,” he noted. After that, he would look at coinmama.com for a subsequent bitcoin purchase. This site allows buying bitcoin with credit cards (as a purchase, not a cash advance), meaning the buyer can collect bitcoin while also earning credit card rewards. DeMuth has made as much as $250,000 per month of such purchases, specifically for rewards. Coinmama.com also offers Ethereum.
Why Diversify Within Cash?
DeMuth noted it is common practice to diversify among credit, equity and cash. It is less common to diversify within cash. However, total allocation to U.S. dollars could be an “extreme folly,” he noted. Sound alternatives exist, such as other sovereign currencies and bitcoin.
“I would consider putting 10% of your cash in bitcoin,” he advised. “Whatever happens to it in the days or weeks ahead, over the long term it is likely to gain wider acceptance and usage.”
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