This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
It’s been a phenomenal month for crypto bulls. On Monday, Mastercard (NYSE:MA) announced a partnership with Bakkt Holdings (NYSE:BKKT) to enable cryptocurrency card payments. And on Tuesday, the FDIC chairman revealed ongoing talks that would allow banks and their clients to hold cryptocurrencies.
In the words of Decrypt’s John Roberts, “Bitcoin’s Netscape moment is finally here.”
Such comparisons to the internet’s first browser, however, might remind investors of a different saying:
No one rings a bell at the top of the market.
While it’s obvious that cryptocurrency is in the middle of a 1990’s-style tech boom, it’s hard to tell whether Bitcoin (CCC:BTC-USD) is Netscape in 1994… or 1997… or the year before the browser shut down in 2003. It’s unclear what today’s crypto wobble signals in the grand scheme of the market.
Jerome Powell, Bell-Ringer
America, however, does have someone who looks like a bell-ringer. Fed Chair Jerome Powell. And last Friday, he made his intentions clear.
“I do think it’s time to taper,” Mr. Powell said at an online conference for the Bank of International Settlements. The U.S. central bank’s bond-buying program could scale back as early as next month.
That’s troubling news for crypto. The Federal Reserve has pumped over $4 trillion into the U.S. economy since the start of the Covid-19 pandemic, 65% more than the total market cap of all cryptocurrencies. Without that liquidity, cryptocurrencies will begin to stall.
As we enter the later innings of the crypto bull run, it’s time to selectively take profits on some of the picks you’ve seen on the Moonshot Investor.
Harvesting Your Crypto Profits
On Monday, Reddit favorite Shiba Inu (CCC:SHIB-USD) bubbled up to become the world’s 11th biggest cryptocurrency. The token is now up 420% since I named it my only low-quality pick back in August. (Doggy derivative Floki Inu (CCC:FLOKI-USD) has since joined SHIB in that category).
Other Moonshot picks have done similarly well. Solana (CCC:SOL-USD) surged past the $200 mark while Terra (CCC:LUNA-USD) rose 40% since September, outperforming both Bitcoin and Ethereum (CCC:ETH-USD). The only blue-chip stinker from this newsletter — Internet Computer (CCC:ICP-USD) — still leaves Moonshot with an enviable crypto record.
But as my Momentum Master strategy makes clear, investors should also know when to lock in profits. And with many cryptos rising to record levels, markets are starting to flash the warning sign: it’s time to cash in.
Take Profits: Shiba Inu (SHIB)
For crypto watchers, following Elon Musk’s tweets might as well be a full-time job. A single tweet by the self-proclaimed “Dogefather” can add (or remove) billions in crypto values within hours.
In this sense, Shiba Inu — an Ethereum token that gained notoriety in July — could become the next Dogecoin (CCC:DOGE-USD). And not necessarily in a good way.
Since reaching a record of 4.4 thousandth-of-a-cent over the weekend SHIB prices have begun to wobble. By Monday, trading volumes had collapsed 40% from a day earlier and prices swung 20% — often a tell-tale sign of weakening investor demand. Investors with long memories may recall a similar phenomenon happened with Dogecoin in May.
It’s still too early to cash out entirely; a petition to get SHIB on Robinhood (NASDAQ:HOOD) garnered more than 300,000 signatures, sending the token higher yet. But smart investors will use the opportunity to sell 50% of their stake to enjoy the 420% Moonshot gains.
Take Profits: Solana (SOL)
Regular readers of the Moonshot Investor will know I’ve written about Solana (CCC:SOL-USD) since May, when I called it an “Ethereum Killer” with “strong potential for gains ahead.”
Since then, Solana has risen 420% (see a theme here?) and now ranks No. 6 by market capitalization. With such massive gains under their belts, investors should also consider taking SOL profits off the table.
It’s not the first time I’ve warned about the limited upside of large-cap cryptos. In the same newsletter, I discussed how Cardano’s 700% gains were a thing of the past. The world’s No. 3 crypto would go on to drop 24% from $2.86 to $2.16.
Solana prices running ahead of investor interest
As Solana continues its ongoing struggle to gain Main Street interest, it’s best to start selling out and buying better-known players. A few that spring to mind include…
Buy: Binance Coin (BNB), Ethereum (ETH), and Dogecoin (DOGE)
These three long-standing cryptocurrencies continue to perform well.
- Binance Coin (CCC:BNB-USD). The native cryptocurrency of Binance Crypto Exchange greases the wheels for token transactions. It’s a clear winner of the shift to tokenized cryptocurrencies.
- Ethereum. On Tuesday, Bored Ape Yacht Club notched a new record with an eye-watering $3.4 million sale. As NFTs continue to rise in popularity, Ethereum — the crypto behind most NFTs — will keep climbing.
- Dogecoin. Interest in the “original” Shiba Inu coin has rebounded, sending prices back into the 30 cent range.
Though smaller upstarts will outperform these heavy hitters, BNB, ETH, and DOGE provide a better risk-adjusted profile, especially since Fed Chairman Jerome Powell could start ringing the “top of the market” bell at any moment.
The Canary in the Coal Mine: Bonds and Crypto
By now, investors have likely grown tired of market doubters crying “swolf.” After eleven years riding a bull market, almost a quarter of people over age 19 have no adult memory of a stock market decline.
But stock and crypto investors alike need to start paying attention to the proverbial canary in the coal mine: bonds.
“The bond market, where traders make their most precise predictions of inflation, is worried about inflation again,” wrote John Arthurs of Bloomberg News. “Five-year breakevens topped earlier this year at 2.75%, virtually matching their high during the 2008 oil price spike.”
And to be clear, all of this matters. Currently, the Federal Reserve buys around $100 billion of bonds every month. That excess liquidity has sent prices of housing, NFTs, crypto, and even 1960s collectible muscle cars to record heights. The moment the plug gets pulled, there’s little reason for non-earning assets to rise faster than inflation.
I’m not saying Bitcoin will fall immediately. Far from it — the blockchain “revolution” already has traditional financial firms on high alert.
But those expecting 2021-style returns on BTC next year should reconsider the odds. With inflation expectations rising, it’s only a matter of time before the Fed ends the show.
Inflation expectations at its highest point since 2005
Selling Is Equally Important as Buying
One pet peeve I have with many stock recommendation services is that they never tell you when it’s time to sell.
Some might claim that buy-and-hold is the name of their game. After all, $10,000 invested into Amazon’s (NASDAQ:AMZN) initial public offering would be worth $19.7 million today.
However, had the same investor bought AMZN in 1997, sold in 1999 and re-bought in 2001, their $10,000 investment would have grown to $341 million instead.
Of course, no one could have known that 1999 was the peak of the dot-com market. The bubble could have easily inflated beyond 2000 had certain historical facts changed. But for those brave enough to take some chips off the table, market peaks have a habit of creating a cohort of investors who can rightly say “I told you so.”
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.