Bitcoin: Wealth Creator or Destroyer?
You can say this about cryptocurrency: It gives the press something to yak about.
A lot of fawning media coverage has been devoted to cryptocurrencies, in large part because they make for a colorful narrative. However, this asset class has plunged in value lately, after China cracked down on crypto mining. The crypto-asset segment in aggregate is down about 50% from its April 2021 peak.
Below, I’ll explain why you should avoid the much-hyped world of exotic assets and instead rely on assets that the press usually finds too dull to cover.
Beijing bytes back…
In recent days, authorities in China have cracked down on cryptocurrency transactions and ordered crypto miners to cease operations. China hosts about three-quarters of the world’s Bitcoin (BTC) mining capacity, because of the country’s well-developed technology supply chains and extremely cheap sources of electricity.
Why the crackdown on Bitcoin and its alt-coin brethren? China’s autocrats covet control, not only over human beings but also the economy. Cryptos can’t be traced by the country’s financial regulators.
Beijing also cites environmental concerns, because crypto mining consumes enormous amounts of carbon-producing energy. However, I suspect the “green” justification is a tad disingenuous. The top-down central planners in Beijing perceive crypto as a threat to the country’s financial stability and management. In previous articles, I warned that government crackdowns posed a major risk to crypto.
We probably haven’t seen the end of crypto’s trillion-dollar carnage. To me, crypto resembles a post-modern pyramid scheme: values rise because investors think they will continue to rise.
There are no fundamental or technical reasons behind crypto price appreciation. The prices of Bitcoin and alt-coins are determined almost exclusively by psychological factors. It’s the fear-and-greed dynamic at its purest.
The global economy’s comeback…
Just as I warned you that cryptocurrencies are inherently worthless and due for a day of reckoning, I also pointed out that fears of inflation are overblown. Sure enough, wholesale prices for certain high-profile goods (notably lumber) are plunging as supply chain distortions get sorted out.
To determine the future direction of the stock market, let’s put aside media hype and look at the hard data.
The global economy has exceeded its pre-pandemic peak, research firm IHS Markit reported Monday, as the recovery picks up steam thanks to vaccinations and the end of pandemic-induced economic lockdowns.
IHS Markit estimates that the global economy will rack up 6.0% growth this year, marking the biggest expansion in nearly 50 years. The following chart breaks down growth projections by country and region:
IHS Markit stated in its report: “The global economy has reached an important milestone in the second quarter of 2021, surpassing the pre-pandemic real GDP peak attained in the fourth quarter of 2019.”
Wall Street has taken note of faster global growth, but the rally has wobbled amid fears of economic overheating. On Wednesday, the Dow Jones Industrial Average fell 71.34 points (-0.21%) and the S&P 500 slipped 4.60 points (-0.11%). However, the tech-heavy NASDAQ added 18.46 points (+0.13%), to hit yet another record high. In pre-market futures trading Thursday, the three indices were poised to open sharply higher.
In addition to faster economic growth, corporate earnings are surging. According to research firm FactSet, the estimated year-over-year earnings growth rate for S&P 500 companies in Q2 2021 is 61.9%, which far exceeds the five-year average earnings growth rate of 4.1%.
The economic numbers are promising, which is more than I can say for ultra-risky investments such as crypto. If you want to gamble, go to Vegas. If you want to build wealth, stick to the fundamentals.
“Boring” but bountiful…
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