Blockchain is About to Hack the Investment Code

 

Our intuition about the future is linear. But the reality of information technology is exponential, and that makes a profound difference. If I take 30 steps linearly, I get to 30. If I take 30 steps exponentially, I get to a billion.

Ray Kurzweil

Are we approaching an ‘exponential moment’ in information technology?

Yes, we are. Imminently.

And my view is that investing wisely around this event will give you the chance to create massive wealth over the next few years.

In fact, it’s already happening.

Over the last few weeks, some strange things have been happening to a certain group of stocks.

You’ve probably never heard of most of them. But if the research I’m releasing next Tuesday is right, that won’t be the case for long. These stocks are going to hit the headlines in a big way in 2018. Because they’re key players in what I believe is going to be the biggest technological ‘step change’ in 60 years.

Take a look at some recent one month returns.

BTL Group [CVE:BTL] just went up 56% this month.

Hive [TSX:HIVE]  is up 102% this month and closed $30 million in funding.

One obscure biotech company changed its name and rocketed 137% in a few days!

Something is starting…

Next Tuesday you’ll find out what that something is. But today I want to take a step back and explain why this coming moment will create an immense ‘step-change’ in how speculative stocks are valued.

How a 10 cent stock will become a 20c or 30c stock literally overnight.

Sounds crazy eh?

If I’m right, it’s the logical consequence of what’s coming.

The logical outcome of a world moving beyond bitcoin.

A real game-changer…

This will all happen very quickly once the market realises it. But if you get in now, you’ll already be set to ride a multi-decade shift in the markets.

First let me deal with a myth.

One taught at business schools up and down the country.

It’s a myth that makes sense to academic boffins with no ‘skin in the game’. But like a lot of academia, it doesn’t actually help you make any money.

And worse still, believing it, stops you from seeing the hidden potential in the stock market.

Let me explain…

A stock moves up 234% in a year.

Another one does 4,011% in just three years.

A crypto can do this in a few days…

This is pure madness right?

Actually it’s not.

It’s perfectly logical.

Well let me add a proviso here; it’s perfectly logical sometimes.

Anyone’s who has read Charles Mackay’s seminal book The Madness of Crowds knows the human species is especially prone to a bout of mass craziness once in a while.

But there are also precise mathematical reasons why a company’s value can — indeed should — move so dramatically.

And why it might not be madness to jump aboard a fast rising trend.

The maths revolves around three concepts. These are concepts central to how a professional evaluates an investment opportunity.

They are time, rate of growth and uncertainty (risk).

When you understand the interplay of these three variables, you start to look at speculative opportunities properly. 

It’s actually a really simple concept, dressed up in fancy maths to confuse people. When I explain it you’ll get it for sure.

And there’s a side benefit when you do.

You see, by understanding how the big players look at things, you start to realise what they’re going to do next. Before they have a chance to do it.

I’ll come back to this point shortly.

But first, what’s the myth I talked about?

It’s the myth of ‘efficient markets’.

Boffins have sold the myth of ‘efficient markets’ for so long, that everyone comes out of university thinking this is the way things are.

The mainstream investing industry revolves around this very concept.

It’s the theory that because so many investors are looking at a stock, the price reflects all known information.

It’s therefore impossible for you or I to beat the market. That is without taking on exceedingly high levels of risk in comparison.

The conclusion?

You should just invest in an index fund and be done with it.

Now there are arguments to be made for this theory with big stocks. Not that I’m completely convinced…but arguments for sure.

But in the small-cap space it’s patently ridiculous.

There are two main reasons.

First, most big funds don’t even actively monitor small caps. They’re simply too small to bother about.

It’s insiders and ordinary investors driving the prices here. It’s more like the TAB, where you are betting against other punters rather than the bookmakers.

Secondly, small-caps live in an environment of high uncertainty. And it’s impossible to quantify this uncertainty with any accuracy.

There might be no cash-flow or profits, a brand new market that’s size is unknown, or a new technology whose potential success is uncertain — but which could be enormous if it does succeed.

This uncertainty results in a far wider range of estimates than in a blue chip stock with a ready market and products.

But a lot of analysts use the same formula for both.

The formula for exponential gains

This formula is a Discounted Cashflow Forecast (DCF).

Everyone uses them.

The idea is you find a price investors should pay now, for a cash-flow generating asset in the future.

I won’t get into the nitty gritty here, but I will explain the effects of time, growth rate and uncertainty.

And why blockchains are going to change this up.

First of all, let’s look at time.

This is simple. The longer it takes for a company’s cashflow to grow, the lower the valuation now.

Imagine you had two companies that were going to pay out a million dollars over 10 years. One will do it with $100,000 every year, and the second one with $500,000 the first year and $55,555 every year after. Guess which one is more valuable?

Yes the second one of course. As you’re getting cash sooner.

The second factor is growth.

Again, this is simple to understand.

If a company is increasing its rate of revenue and profit growth at a faster rate than a comparable company, its valuation is better.

And lastly, uncertainty. This is the ‘discounted’ part of a DCF.

Professional analysts discount future cashflow by a rate to account for the riskiness of the project.

A venture capital fund uses a rate typically between 50–70%. Whereas a blue chip stock may only have a discount rate of 8–12% applied to its future earnings.

The higher the discount rate, the lower the present valuation.

Small changes to this figure make a large difference.

What this got to do with the ‘step change’ event that’s approaching?

OK, let’s put this together.

Blockchains are going to make a whole host of speculative stocks more valuable.

How?

First they’ll speed up access to data, drastically cutting research times down. As you’ll recall, time is a crucial part of the DCF formula.

Then they’re going to increase the growth rate for certain blockbuster stocks. These are stocks with the most to gain from the new reality we’re about to see.

And lastly, the wave of money going into blockchain technology is significantly decreasing the technological risks.

All-Time Cumulative ICO Funding 20-10-17

Source: Coindesk

[Click to open new window]

This funding level reduces the risk in blockchain technology by increasing the amount of resources in the research side of things.

Of course, when you’re investing in cryptocurrencies this can make it harder to pick the winning crypto…

But if you’re investing in stocks that benefit from blockchain tech, this is actually a good thing.

Big money, idealistic motivations, game changing possibilities.

It’s an historic point in time. And a very exciting one for investors like you, in my opinion.

And it completely alters the investment code.

Once the professional analysts realise what’s happening, the value of every single ‘blockchain’ stock goes up.

It’ll look like madness. But it won’t be.

It’s the exponential effect of undeniable maths. Powered by a blockchain revolution that’s set to start soon.

In just a few days I’ll release my research into this once-in-a-lifetime event. And how you can profit from it.

Good investing,

Ryan Dinse,
Editor, Money Morning


Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

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