Are you under 30… or even 40?
Did you miss that moment when asset prices (property and stocks) completely fell out of sync with wage growth?
Well, this explains why more and more young people are adopting cryptocurrency assets as a way to get ahead.
Over the past year, the price of Bitcoin has risen around 160%. You'd have to get your speculative stock picking job to get something like that.
Source: AI generated image courtesy of Canva
Although, interestingly, what is at stake at Rolls-Royce [LON:RR] or Nvidia [NASDAQ:NVDA] I've done it more than 200%.
But to warn you: Bitcoin has been more volatile than even the most speculative large-cap stocks. Between November 2021 and November 2022, it plummeted more than 70%.
Source: Google Finance
As you move forward in life, there is a component that can protect you from some volatility and pay you to hold your assets for long-term growth. (Real wealth is built over the long term. Even Bitcoin has reached 500% in five years.)
That component is income yield.
The secret ingredient to income performance is that it can allow you compound. In fact, over time, if you don't need to withdraw income, it can make up a large part of your return. This has certainly been the case for UK stocks since 1987:
Source: Interactive Investor and Morningstar
It's easy to build wealth with dividend-paying stocks. Dividends from quality companies tend to rise faster than inflation. And while you may start with an initial return of 4% or 5%, over the years that return can increase a lot (over the initial price) as things grow.
Mostly, though, I like the security of knowing that there is decent passive income available in case I don't want to work all hours of the day.
Some people believe in gold...
Yes, it has much less volatility. And it's true, gold has maintained its value since biblical times.
But it is very difficult to get returns on gold. Like Bitcoin, you hold it to increase value.
As for property, unless you are purchasing a large-scale business, performance tends to require a lot of time and work managing leases.
So is it possible to earn income from Bitcoin?
Some cryptocurrency holders seek income through staking.
Staking is where you lock your coins for a set time so they can be used to validate transactions on the blockchain.
Unfortunately, betting is not available in Bitcoin. This is because the Bitcoin blockchain uses proof-of-work consensus, not proof-of-stake.
So if you see Bitcoin staking, it's probably more akin to lending your coins than a true blockchain staking.
This already suggests that earning income from cryptocurrencies involves quite a bit of risk.
Beyond Bitcoin, many of the smaller cryptocurrencies carry more risk and volatility.
Providing your Bitcoin for lending (or taking advantage of a yield opportunity) inevitably means handing over your assets to a third party. This adds custody risk.
What about Bitcoin ETFs that offer performance?
There are now Bitcoin exchange-traded funds that offer returns. These are easily available. I can buy them on our brokerage platform the same way I would buy a line of stocks.
An example is the Bitcoin Performance ETF Purpose [TSE:BTCY].
At the time of writing, it offers a yield of around 9%, with management fees of 1.1%.
So how does it work?
It is actually an options strategy. Return is generated by selling covered call options on underlying Bitcoin assets and collecting the associated premium:
- A call option is a financial contract whereby a buyer has the right to purchase an asset at a predetermined price ("strike price") on a predetermined date.
- It makes sense to exercise that if the asset price is above the strike price.
- The buyer of the option will pay a premium to the seller, and the seller will keep it whether the option is exercised or not.
- A 'covered call' simply means that the seller of the call option owns an equal amount of the underlying asset. They sell the right for someone else to buy, usually at a higher price.
The main risk of covered call options is that the asset's price appreciation will be lost if it exceeds the strike price. For example, if the fund writes a covered call option on Bitcoin for $75,000 but it reaches $100,000, it only receives the $75,000 profit (and the premium paid).
Clearly, the premium can be used to pay a good return to fund holders. But if Bitcoin shoots for the stars (as many believe it will), there may be a big trade-off between income and capital growth.
In fact, in the last five years, the value of this fund has fallen:
Source: Google Finance
Therefore, it would appear that holders wanting exposure to Bitcoin have potentially given up over 500% in exchange for achieving income performance.
No doubt in the world of ETFs, more exotic methods will be developed to find ways to generate returns from cryptocurrencies.
It seems to me that one of the easiest ways would be to manage an active fund that trades Bitcoin and pay out part of those profits as returns.
Regarding stocks that pay dividends, some analysts will argue that you must also forgo capital growth to earn a decent return. Typically, this is because companies that pay dividends are more mature companies that don't have as many options to reinvest in their growth.
But I would argue that a smart investor finds an optimal intersection between growth and performance. A company that can grow and generate decent income. These two objectives are usually complementary.
Are you looking for someone to defend you?
Whom Morning of wealth, we run a night trading desk focused on global markets. Our goal is to build defensive, income-rich portfolios for our Eligible Customers and Wholesalers.
Do you have previous investment experience?
Are you a sophisticated investor?
Or have you accumulated significant wealth?
All of these characteristics could qualify you as an Eligible Investor or Wholesaler for a managed account under our strategy. The assets remain in your name and you retain full ownership and custody of your assets.
We are currently offering free consultations in this opportunity. I encourage you to reach out at this crucial time.
You will always miss 100% of the shots you don't take.
Greetings,
Simon Angel
Editor, Morning of wealth
(This article is solely the personal opinion and commentary of the author. It is general in nature and should not be construed as any financial or investment advice. Contact a licensed financial advice provider to discuss your personal situation. Past performance is no indication of the future and dividend income is not guaranteed. Wealth Morning Offers Managed account services for wholesale or eligible investors as defined in the Financial Markets Conduct Act 2013).
