Getting Involved in Bitcoin

When bitcoin value skyrocketed in late 2013, everyone suddenly started paying attention to this unusual currency. A large number of online businesses already accept bitcoins as payment, and a handful of brick-and-mortar grocery stores and restaurants are joining the club. A NYC entrepreneur is working on installing the first bitcoin ATM.

Of course, the majority of us barely understand how bitcoins work. Why do you have to mine them? Are they backed by a stable currency? Are they even legal?

Here are some answers to your bitcoin questions, as well as how you can get involved in this emerging currency.

Are bitcoins legal?

Whether or not bitcoins are legal depends on the country. Many countries, including the United States, Canada, and Australia, have agreed that bitcoins are legal, in the sense that they can be used to pay for a transaction if both the buyer and seller agree. Governments are still working out how bitcoins should factor into income taxes, and whether there needs to be additional regulation placed on bitcoins to fully integrate them into the nation's currency.

How do bitcoins work?

First, you need to register for a bitcoin wallet. This is an app that lives on your computer or smartphone, and acts like a virtual bank for your bitcoin transactions.

Next, you need to mine bitcoins or trade for bitcoins. These bitcoins show up as value in your wallet. This value is also recorded in what is called the block chain, a publicly-available record of all bitcoins, all bitcoin owners, and all bitcoin transactions.

Once you have bitcoins in your wallet, you can begin spending them -- or you can save them, in the hopes that they will increase in value. Other cryptocurrencies like Ethereum and litecoin, have become popular alternatives to bitcoin as the cryptocurrency market has matured.

What is bitcoin mining?

Here's a short explanation of how bitcoin mining works, from The Telegraph: "You tell your computer to crunch through a set of difficult mathematical problems and success is rewarded with bitcoin."

The actual process is a bit more difficult. The mathematical problems, often called algorithms, generally involve more computing power than a single laptop can handle. Bitcoin miners form teams and combine their computers' processing resources to churn through these complicated algorithms. 

Why is bitcoin linked to solving algorithms? Simply put, you are receiving payment for your computer's labor. Of course, like many jobs, bitcoin mining requires a lot of work. That has prompted many people to turn away from bitcoin mining and acquire bitcoins through bitcoin trading.

What is bitcoin trading?

Bitcoin trading is the term for buying and selling bitcoins on the open market. You will probably be asked to buy bitcoins for slightly more than their current value, in the hopes that the bitcoins will continue to increase in value after you purchase them. 

If you had traded for some bitcoins at the beginning of 2013, the value would have jumped from about $13 per bitcoin in January of 2013 to $1,200 per bitcoin at the high value point in November 2013 but that number has been in steady decline. In January 2014, bitcoin value was hovering around $900 per bitcoin. In early spring 2014, the exchange rate for a single bitcoin is about $480—so it’s dropping but it is still a significant gain on your investment.

Is there any danger of using bitcoins?

As always, users need to watch out for scams and fake bitcoin apps. Make sure you have a fully-updated security software suite to prevent accidental viruses or malware that come through bitcoin and other apps.

Bitcoins also fluctuate more than other currencies; they are still technically an unstable currency, and users may lose money. The high-value point that bitcoins reached in November 2013, for example, was immediately followed by a significant drop.

It is helpful to look at bitcoin investment the same way you look at playing the stock market (as opposed to investing in a commodity like gold or silver) and invest your resources wisely. Make no mistake—investing in bitcoin is a gamble—a risky gamble. Do not plunk down thousands of dollars for a few bitcoins with the hope that they will suddenly soar in value. Sure they could but, because they aren’t backed by a steady currency or commodity, their value is not guaranteed or predictable and, even scarier—is subject to the whims of those who made it. Tread carefully!

If you are interested in learning more about bitcoins, open up a bitcoin wallet and try mining a few coins, or wait until the market drops a bit and then start trading. If you are very lucky, your initial payment will significantly increase in value over time.

Why You Should Dump Those Shares of Tesla Now

Any investor who has ever heard of Tesla (TSLA) is probably aware that the stock is currently up more than 400% so far this year. With gains such as that many people are continuing to jump onboard and ride the wave. But not so fast. Keep in mind that I like to follow Warren Buffet’s advice to be fearful when everyone else is greedy and be greedy when everyone else is fearful. However, aside from that and the fact that history has proven in most cases that extraordinary gains like this are eventually followed by a sudden and resounding crash, here are some cold hard facts you can take to the bank, or your broker while you place your sell order.

Seeking Alpha’s Ayush Singh has come up with a nice comparison between Tesla and other car manufacturers to illustrate how overvalued Tesla is currently.

The company expects to sell 21,000 cars in 2013 and is presently trading at around $165, which translates into a market cap of just under $20 billion. But, given the amount of cars Tesla sells, this valuation is too high to be justified.

Aswath Damodaran, a Professor of Finance at the New York University, may not be a household name, but he's made some of the most accurate share valuations in the recent past - predicting Apple's peak and Facebook's low, to name a couple. And now, after doing his math on Tesla, Damodaran concluded that Tesla is worth $67.12. When he came up with this figure, Tesla was trading at $170.62, and after working out a comparative index, I believe he may be right.

In this index, I compared Tesla's share price with its production and profitability and compared it against the other big guns of the automobile industry and this is how the results stacked up.

Company's Name	Market Capital (Billion)	Unit Production	Value/Car
General Motors (GM)	$49.91	9.288 million	$5,512
Ford (F)	$69.38	5.708 million	$12,126
Toyota Motor (TM)	$204.29	9.692 million	$21,297
Honda Motor (HMC)	$72.49	3.137 million	$23,015
Tesla	$19.97	21,000	$950,952

Source: Yahoo Finance, Bloomberg, Zacks and Author's Calculation

Hence, Tesla is charging close to $950,952 per car, which translates into around 14 times the actual cost of the vehicle under the assumption that it is free to manufacture! Given real operating gross margins of 13% on its $70,000-priced Model S, Tesla is generating about $9,000 in gross profit from each car that it manufactures. Despite that, investors are placing an irrational valuation of around $950,952 on every car! Going by such calculations, Tesla will need to enhance its production by 20 times in order to be twice as expensive as Honda, which is the next big car maker, on a value-per-car basis.

A 20-fold jump may seem far-fetched, but that is exactly what Tesla bulls anticipate and they expect it to happen before 2020. But even if the company somehow manages to multiply its production by a factor of 20, will it justify a market cap of $20 billion or will it have to sustain its growth for a longer period of time to justify today's share price?

Dana Blankenthorn has a strategy for Tesla investors based on the fact that even Elon Musk acknowledges Tesla is overvalued.

How you deal with this depends on the kind of stock owner you are. Traders may continue getting profits out of Tesla for some time, but they must be warned that, when the fall comes, it will be sharp and sudden. Careful attention must be paid to small technical moves, to any move regarding momentum, or you'll lose your gains in a heartbeat.

For investors who may have bought their shares in the first quarter of this year, when the price was less than one-third what it is now, the situation is different. You can sell less than a third of your present stake and have all your investment out of the stock.

While the company may not be worth today's $20 billion, it may well be worth yesterday's $5 billion. Sales have been doubling every year. Gross profit is 25%. These are unheard of for a mass manufacturer. You're betting that Tesla can indeed use robotic manufacturing technology and scale to bring the company into lower price points, and get ancillary gains through the battery business. These are not unreasonable assumptions.

But I wouldn't pay 50 times sales for that, which is what you're presently paying. On a fundamental basis, Tesla is in a bubble. Those who believe in fundamentals can take their profit and wait for the bubble to pop - although they may risk some remaining momentum gains - or take out their initial investment and know that, even after the bubble pops, they're in the clear.

If you were one of the lucky investors who purchased your shares earlier in the year, you should consider cashing out now while you’re significantly ahead. Alternatively you can decide to hold onto those shares, or even continue putting more money in, but doing so would be a very risky move, even if you have the ability to hang onto them for many years to come.

HOW CAN THE MARKET REACTION TO THE GOVERNMENT SHUTDOWN AND DEBT CEILING DEBATE BE A GOOD THING FOR INVESTORS?

Market reactions to the uncertainty surrounding the partial U.S. government shutdown and debt ceiling debate have been highly predictable, with all major indexes showing steady declines with each passing day. On Tuesday October 8th the S&P 500 index closed at 1,655.45, down 20.67 or 1.23%. The Dow Jones Industrial Average closed at 14,776.53, down 159.71 or 1.07% and the NASDAQ Composite closed at 3,694.83, down 75.54 or 2.00%. The value of the U.S. dollar has also declined against most major currencies. However, this may be good news for long-term investors.

Between the government shutdown and the debt ceiling debate the one that scares investors the most is the potential for the U.S. government to default on its debt if the borrowing limit is not increased, and there are plenty of reasons why investors should be scared, however unlikely the threat of default:

Consumer Confidence

Consumer spending drives the economy and when confidence in the economy is shaken spending drops significantly as consumers and businesses alike begin to horde more cash. This also results in fewer investments, driving the value of securities down.

Treasury Securities

Governments and banks around the world hold U.S. Treasury securities. They account for about 11.6 percent of total public debt. The Social Security fund holds nearly 30 percent of the outstanding securities. Not only would a debt default destroy the U.S. finances, but it would also damage the fiscal houses of governments and banks around the world.

Borrowing Cost

As the U.S. Treasury has explained, “Investors’ willingness to lend to nonfinancial corporations is often summarized by credit risk spreads — that is, how much higher yields on private securities are than yields on comparable maturity Treasury securities. If investors are less willing to invest, they demand a higher return for that investment. From the borrowers’ perspectives, wider credit spreads imply a higher cost of funding for a given level of Treasury rates. Higher funding costs lead to less spending on investment or other outlays that are financed.” In a nutshell this means that interest rates will rise, investments will slow, and the economic recovery will be at risk.

Equity Markets

Economic uncertainly creates volatility in the markets. Increased volatility can cause investors to exit the market, driving the market down, in addition to and causing households and businesses to reduce spending. During the last debt ceiling standoff in 2011, the S&P 500 fell about 17 percent.

Bond Markets

Markets are all interrelated with the solvency of the U.S. Treasury being the glue that holds them all together. In the event of a default bond prices will plummet as interest rates increase.

All of these possibilities are already rankling investors, as shown by recent trading. However, there is a silver lining that many investors fail to see, yet one that the most successful investors regularly recognize—opportunity. 

Warren Buffett follows the rule, "Be fearful when others are greedy, and be greedy when others are fearful." Essentially this means that when the market spikes you should be more conservative in your investments due to the potential of downward correction resulting in losses. The flip side of that is when the market dips then you should take advantage of the lower prices, expecting an eventual upward correction resulting in gains. It’s not rocket science, yet many investors fail to understand and heed this advice.

Buffett recently provided proof that this advice works. During the Great Recession Buffett invested $25 billion, mostly into large companies having significant financial troubles at the time. Companies like Bank of America, Mars/Wrigley, General Electric, Dow Chemical, and Swiss Re. As a result, he recently disclosed that those investments have netted Berkshire Hathaway a profit of $10 billion during the somewhat modest recovery thus far, including a $300 million yearly dividend from Bank of America alone!

While it’s likely that you lack the financial resources of Warren Buffett, your portfolio can still benefit by using this strategy. If you typically invest a set amount of your income each month, refusing to reduce your investments in a market dip will result in similar returns when the market recovers. If you have additional disposable income to invest during a dip, then doing so will result in even greater returns in the future as the economy improves.

The trick to using this strategy is to remove emotion from your investments and invest when you have time on your side. When investors become scared and exit the markets en masse, instead of following suit like a lemming over the edge of a cliff, double down on your investments. Additionally, as investors are regularly advised, the more time you have to hold onto your investments the better returns you will reap. That’s just one more reason why you should begin to grow your investments early on in life. Doing so will allow your investments to weather the storms and provide gains when you finally need them in retirement.

INVESTORS UNSURE WHAT TO THINK OF FACEBOOK

Facebook (FB) has had a tumultuous time since its May 2012 IPO. The IPO price was $38 and quickly headed downhill to a record low of $18.75 in August 2012. The stock remained slumped below $30 per share for most of the year that followed, leaving many investors disillusioned and disheartened.

• During that time there was a wide range of controversy and criticisms surrounding the social media giant including:
• Speculation that CEO Mark Zuckerberg is incapable of leading the company
• A Zuckerberg family photo that stirred up a hornet’s nest about privacy on the social media site
• Reports that Israel used Facebook to target pro-Palestinians, denying them entry to the country
• Many companies pulled their ads from Facebook in response to complaints that the company endorsed content depicting rape and domestic violence
• A PR debacle ensued after Facebook reportedly mistakenly removed posts from a free-speech group citing human rights abuse in Syria
• CEO Mark Zuckerberg’s Facebook page was hacked in order to prove a security flaw existed; an act that initially brought about the company’s refusal to pay the hacker compensation for reporting the security flaw
•  Another PR nightmare when Facebook’s participation in a NSA spying program was revealed

And that’s just some of the more prominent and high profile situations, all of which seem to have helped to suppress the stock price.

But then in August something changed. The stock finally jumped past the IPO price and continued to climb steadily, reaching a record high of $50.60. Now, suddenly investors who had shunned the company have become drawn to it again. Yet there are still mixed signals about Facebook’s future.

Analyst Northrop Puckett feels that the stock is overvalued, stating that the company will soon “become a shell of its former self, like AOL”.

“The company has a P/E ratio of 175, which is obviously high. It has a forward P/E ratio of 49, which is also quite high, but better than 175. But it seems over-priced considering its fast 5 year growth rate. The company has a PEG (P/E ratio to growth rate) of 5.74 which is very high. For context, Peter Lynch stated that normal stocks have PEGs of around 1. PEGs significantly under 1 mean that the company may be undervalued when taking into consideration its 5 year expected EPS growth. On the other hand, a PEG of 5.74 either means that the stock is i) overvalued compared to its 30% expected growth rate, or ii) that analysts are way off on that growth predictions. It is worth noticing that if predictions for next year's earning growth are correct, you could then see a more reasonable PEG of 2.16 show up. However, that is still relatively high.

Facebook's price-to-sales ratio sits at a quite high 18.57. Additionally, its Q/Q sales are down -19%. Compare it to another (overpriced) online network -- LinkedIn (LNKD). LinkedIn has a price-to-sales-ratio of 21.42, and a Q/Q sales increase of 59%.

Facebook also has an Enterprise Value/EBITDA of 39, which is pretty high. Other "high flyers" like Chipotle (CMG) and Priceline (PCLN) have Enterprise Value/EBITDA of 21.2 and 22.81 respectively.”

Then on the flip side, Jayson Derrick claims the stock is undervalued and will continue to perform.

“1) Facebook has more than 1 billion users, and is still growing this tally above 20% year over year. The massive amount of data that the company has already collected (and will continue to collect) from the billion plus users will be an extremely valuable asset that can be utilized in various ways to generate revenue.

2) Facebook has a vast array of growth opportunities that have yet to be rolled out or even discovered. Specifically, in the near term, the company will roll out video advertisements for U.S users, which can be rolled out internationally over the coming years.

3) Facebook currently has huge investment plans, which include maintaining data servers to keep up with a growing user base. The company has already spent $595 million in 2013 and expects its investments on infrastructure to total $1.6 billion by the end of 2013. In the short term this can lower margins, but an increased investment is a positive aspect as the company continues to expand internationally and gain new users.

4) Management has silenced the bears and nay-sayers who were convinced that the company couldn't meaningfully monetize on mobile users. The company has, so far, addressed what I believe to be the biggest bear argument and only valid thesis against owning shares. Mobile ad revenue represents 41% of the company's revenue mix and is still in its infant stages with significant growth opportunities over the years. In terms of actual numbers, in the second quarter of this year, the company sold $656 million of mobile ads, an increase from $375 million in the previous quarter.

5) Although engagement levels are always a concern, Facebook's measure of daily average users and monthly average users has remained consistently high and showing no signs of faltering. In July, the company reported its daily active users totaled 699 million for the month representing an increase of 27% year over year. In the same month, monthly active users totaled 1.15 billion users, an increase of 21% year over year.”

While both sides have valid points and arguments, this emphasizes the uncertainty behind Facebook’s stock at the present time. Regardless of which situation pans out, one thing is certain, purchasing Facebook stock any time soon is going to be a gamble that should be severely scrutinized beforehand.