7 Cryptos to Ride Bitcoin’s Surge (and Survive the Shakeout)

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Bitcoin Gets an ETF, and The Battle of the Flokis Continues

A Bitcoin (BTC) coin sitting on a mossy piece of wood.

Source: Shutterstock

On Tuesday, the ProShares Bitcoin ETF started trading under the ticker NYSEARCA:BITO.

“BITO will continue the legacy of ETFs that provide investors convenient, liquid access to an asset class,” commented ProShares CEO Michael Sapir in the press release.

Eagle-eyed investors however, might have noticed something odd. Rather than buy Bitcoin (CCC:BTC-USD) directly, ProShares is buying futures of the cryptocurrency to get around Securities and Exchange Commission rules. In other words, BITO investors are holding a derivative of BTC, not the crypto itself.

That opens up BITO to the same issues that plague the U.S. Oil Fund (NYSEARCA:USO). When futures prices diverge from spot prices, a reasonable bet on a promising asset can transform into a disastrous loss. Commodity traders call this a “negative roll yield;” regular investors just call it “getting screwed by false advertising.”

A chart comparing the difference in price between oil spot prices and USO, an oil futures ETF, from 2020 to the present.The difference between buying spot vs. futures in oil

Meanwhile, Floki Inu (CCC:FLOKI-USD) and its 10,000 copycats (copydogs?) continue to dominate social media. Yesterday, four out of the top five trending cryptocurrencies on CoinMarketCap were Inu-themed. The seventeen “Floki” coins listed on CoinMarketCap now have a combined (self-reported) market capitalization approaching $1 billion.

Cynical investors will quickly see the link between Bitcoin ETFs and Floki Inu tokens. As Bitcoin has mounted a resurgence, both Wall Street and retail investors have piled into blockchain assets that seem “close enough” to the real thing.

But as Irish actor Graham Norton once said, “A good rule to remember for life is that when it comes to plastic surgery and sushi, never be attracted by a bargain.”

As the blockchain ecosystem matures and laggards drop out, perhaps cryptocurrencies should get added to that list too.

An illustration of a shiba inu holding a Bitcoin.

Source: Catalyst Labs / Shutterstock.com

All Eyes on Crypto

Last week, Federal Reserve Bank of Richmond President Tom Barkin joined the growing chorus of officials warning about the federal reserve’s bond-buying “taper.” The Fed’s $120 billion-per-month program — equivalent to one-third of all U.S. Federal government expenditures — could end within months.

Crypto investors didn’t seem to mind. This week, Bitcoin broke through $62,000 and is now challenging its April record high. Solana (CCC:SOL-USD), my top pick from September, has notched an even higher gain of 45%.

But the love hasn’t been spread evenly. Cardano (CCC:ADA-USD) — a coin I called an “oversized housepet” with limited growth  — has dropped 26% since that mention in my September newsletter.

Why the divergence?

The reason, of course, is that cryptocurrencies are starting to differentiate by how useful they are to society. Bitcoin and Binance Coin are finding themselves increasingly employed as tradable currencies, while Cardano’s star-studded team has failed to deliver on increasingly far-off promises.

7 Useful Cryptos for 2022

As the Great Crypto Shakeout continues, you can expect only the best coins to survive:

  • Binance Coin (CCC:BNB-USD). BNB continues to grease the wheels of token finance, allowing crypto punters to trade tokens like Shiba Floki and SafeMoon for pennies.
  • Chainlink (CCC:LINK-USD). As the world’s largest oracle network, aka interface between blockchains and real-world events, Chainlink is becoming an irreplaceable tool for smart contracts.
  • Terra (CCC:LUNA-USD). South Korea’s most popular DeFi platform isn’t so much a “Squid Game” as it is a multiplayer cooperative where everyone wins. Terra’s ecosystem of cryptocurrencies, stablecoins and payments systems has grown from a $5 billion market cap in July to more than $10 billion today.
  • Solana. I’m re-iterating my call on Solana, a cryptocurrency that counts Audius and Waves as part of its ecosystem. It’s a powerful alternative to Ethereum that can be bought for far cheaper than its better-known rival.
  • PancakeSwap (CCC:CAKE-USD). Like other automated market makers (AMMs), CAKE thrives on the size of its pool — the more players involved, the greater the liquidity in the pool. And as the most popular decentralized exchange on the Binance Smart Chain, CAKE’s head start creates a virtuous cycle of ever-growing liquidity.
  • Internet Computer (CCC:ICP-USD). The jury is still out on ICP, a blockchain that promises to bring  “web speed” computing to everyday life. But given its well-funded financial backers — including Silicon Valley’s Andreessen Horowitz — ICP could potentially raise money through VCs as well as ICOs to fund its development push.
  • Ethereum (CCC:ETH-USD). Finally, my No. 1 pick of 2021 continues to do well thanks to its dominant position in NFTs. In fact, ETH price growth has doubled Bitcoin’s rise since I recommended the coin, and its smaller starting point gives it more room to run.

Bottom line: As the Fed starts tapering, it’s essential to hold onto cryptocurrencies that have real-world use — and ditch the speculative pretenders.

An illustration of a napping shiba inu with a thought bubble showing the dog dreaming of itself sleeping with its own tinier recursive thought bubble.

Source: Catalyst Labs / Shutterstock.com

BTC ETFs vs. Floki Inu: The Battle of the Derivative Crypto

Let’s make it clear: Investors should stay away from the ProShares Bitcoin ETF if they can. No matter how hyped-up a derivative ETF gets, it’s a poor substitute for owning the real thing — a fact hammered into me by my early years as a commodities trader.

The reason for avoiding BITO is simple. The ETF invests in Bitcoin futures — an asset that will naturally “contango” (a phenomenon where prices tomorrow, aka futures, cost more than spot prices today).

And buying such an asset is death by a thousand cuts.

Currently, BITO is mostly invested in October Bitcoin futures, a fact you can see for yourself on the ProShares site. Prices of these futures as of writing are $63,885, or 0.3% higher than spot prices.

What’s worse: when these October futures start to expire, ProShares will need to “roll forward” those contracts into November ones, a contract that costs $64,455 today (or 0.9% higher than the October one). The same will happen in December… and January… and February… until investors are quite literally sick of losing money.

Equally bad: much like USO in April 2020, BITO is starting to run up against CME position limits. That would force the fund to buy longer-dated futures, exacerbating the initial problem. That’s how investors can lose money on a futures ETF, even if the underlying asset remains flat.

For those eyeing a position in the world’s “digital gold,” it’s better to buy BTC directly instead.

The Floki Inu Lookalike Contest

Not to be outdone, makers of Floki Inu lookalikes continue to profit off of unwitting marks. Prices for RedFloki, Baby Floki Billionaire, Flokipup and SpaceX Floki are off their all-time highs by anywhere from 30% to 70%.

These tokens (not cryptocurrencies, mind you) cost pennies to create on the Binance Smart Chain. Add in a couple of thousand dollars for the initial liquidity pool and Twitter bots, and you suddenly might have a million-dollar cryptocurrency on your hands.

Irate readers might balk. “Why can’t you just give me the list of Floki Inu tokens that will win?” That’s because, with 10,500 Floki tokens across the BSC and Ethereum blockchains, picking the next winner is a lot like playing the lottery. You might score a winner, but the low probability means you end up losing more in the long run.

For those who insist on buying a Moonshot cryptocurrency, I urge you to stick with the most popular three on my “buy” list: Dogecoin (CCC:DOGE-USD), Shiba Inu (CCC:SHIB-USD) and Floki Inu.

Bottom Line: Avoid both Bitcoin futures ETFs and Floki Inu lookalikes. They’re more expensive than investors realize.

The Derivative Dance

In financial theory, free lunches are not supposed to exist. Hypothetically, those who outperform the market are only doing so by taking on more risk. And by extension, no investor can underperform the market with bad picks.

Of course, we know none of that is true. People profit from the Inside Track all the time by trading on privileged information. And anyone who tells a former Enron investor about market efficiency is asking to get their Christmas party invite revoked for good.

Then there’s the world of futures ETFs, a segment that has consistently underperformed. A study by the CME group — the primary exchange for futures — found that $10,000 invested in S&P 500 Futures would have returned $2,330 less between 1990 and 2013 than the same $10,000 invested directly in the market.

VIX ETFs fare even worse.

“These funds almost always lose money long term,” Fidelity unceremoniously warns investors on its VIX ETF site. The effect of contango leads to “massive double-digit losses over the course of a typical year.”

A chart comparing the VIX index to the VXX ETF from 2018 to the present.

So where does all that money go? The answer isn’t as straightforward as you might expect. Many physical assets have a “cost of carry” that compensates those who store the goods, but that doesn’t explain contango in financial derivatives.

Then there’s “collateral yield,” a risk-free rate that traders require to hold onto an asset. Again, that can’t possibly explain the double-digit losses that many ETF investors face.

Finally, there’s speculation; investors selling Bitcoin futures don’t want to lose money either, so many are pricing futures higher than they otherwise would. In this case, it’s the market makers who are minting money for themselves.

Whatever the case, Bitcoin and other futures-related ETFs are generally a bad trade for investors. When it comes to complex financial products, Wall Street usually finds a way to win.

P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at moonshots@investorplace.com or connect with me on LinkedIn and let me know what you’d like to see.

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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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/10/7-cryptos-to-ride-bitcoins-surge-and-survive-the-shakeout/.

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