Camelot Portfolios Talking Points

Crypto-Currency, a Replacement for the Almighty Dollar

Every single day, exchange rates regularly fluctuate between different currencies. Some countries’ currencies are more volatile on a daily basis, but some are fairly close to the value day to day. An interesting part about all of these traditional currencies is they are backed by the full faith of their respective governments. Take for instance the US Dollar. When you open your wallet and pull out any bill, the words “This note is legal tender for all debts, public and private.” You will also find the signatures of two members of the Treasury of the United States to make the note a valid contract. Now this may seem archaic believing the value is backed by some government, but crypto currencies derive their value in a less traditional manner.

In the digital age, the trade of digital currencies is creating a new exchange of value among people. The properties of these currencies are the same:

1.     Store of Value

2.     Medium of Exchange

3.     Unit of Account

The first point is the most controversial for digital currencies. The value of a cryptocurrency is backed by no substantial entity like a commodity or government. Although the value is not traditional, adopters of the currency attribute its value to an enormous “network effect” (Lingham). This “network effect” is crucial to the store of value because of the entities who use it to trade goods and services (Lingham). The greater the pool of entities who use this currency, the greater the stability and acceptance. Thinking along these lines given there is a greater pool, the largest digital currency, Bitcoin, has an estimated 10 million holders (Torpey). While there is a greater amount of people who hold bitcoin, the velocity of the exchange of digital currencies is another concern in this pioneering idea.

The concern with the exchange of digital currency is most of the currency used as an investment tool rather than a transactional base. According to a study from Coinbase, 54 percent of the users in the survey use bitcoin as an investment (Torpey). Reported transactions have increased over time for this digital currency, yet the velocity of exchange is important for liquidity.

Despite the fact there are problems with the credibility into the properties of digital currencies, there is a definite euphoria around the rates between digital and traditional currencies. The exchange rate between Bitcoin and USD peaked on June 6 with 1 Bitcoin trading at $2881 (Yahoo Finance). Other digital currencies like Etherium reached $395 on June 13th (Yahoo Finance).

It may see the same fate as 3D printing in 2011-2013, housing in 2007-2008, or dot com companies in 1997-2000.  Whether or not digital currencies continue to trade at these levels is hard to tell, but they are catching attention.

FOMC Raises Interest rate Target, Normalize Balance Sheet

In the their 4th meeting for 2017, members of the Federal Open Market Committee decided to increase rates by 25 basis points (Federal Reserve). Going forward, the target rate by the Fed is 1.25 (Federal Reserve). This is the second rate hike this year, and many forecasts provided by financial firm’s project at least one more rate hike in 2017. Chairman of the Federal Reserve Bank (‘Fed’), Janet Yellen, gave suggestive vocal ques over the past couple of months indicating this increase in rates. In the minutes from their previous meeting in May, the views of members in the committee noted “…The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.” (Federal Reserve)

Other interesting notes taken from June’s meeting were plans to reduce the balance sheet. Initial plans outlined by the committee include trimming reinvestments in treasuries by $6 billion per month, and $4 billion per month for MBS (Federal Reserve). They intend to increase these amounts in 3-month increments (Federal Reserve). Adjustments will be accommodative pending the economic environment (Federal Reserve).

 Compiled by the Camelot Portfolios Investment Committee

Darren Munn, CFA, Chief Investment Officer

Eric Kartman, Research

Drew Steinman, CPA, Trader/Research

Zach Hartenburg, Analyst

Frank Echelmeyer, MBA, CKA®, Advisor Consultant

-for Broker/Dealer and RIA use only-

 References

Federal Reserve. FOMC issues addendum to the Policy Normalization Principles and Plans. June 2017. https://www.federalreserve.gov/newsevents/pressreleases/monetary20170614c.htm. 2017.

—. FOMC Minutes May 2017. May 2017. federalreserve.gov. 2017.

Lingham, Vinny. Bitcoin: Commodity, Store of Value or Digital Currency? January 2017. https://vinnylingham.com/bitcoin-commodity-store-of-value-or-digital-currency-93457cd27c9c. 2017.

Torpey, Kyle. Report Estimates There are More Than 10 Million Bitcoin Holders Worldwide. 11 January 2017. https://coinjournal.net/report-estimates-10-million-bitcoin-holders-worldwide/. 2017.

Yahoo Finance. BTC/USD. 2017. finance.yahoo.com. 2017.

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