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The Hutch Report

The 4 Cryptocurrency Opinions To Avoid

By | Cryptocurrency, Money, Psychology, Technology

The level of trading activity in Bitcoin and other cryptocurrencies has begun to attract the attention of the general public. It seems to be everybody’s favorite subject these days. Discussion and debates about Bitcoin are raging at dinner tables across the nation and around the world. In addition, the number of articles outlining Bitcoin’s future trajectory have increased daily. In spite of the number of financial media channels having previously written it off as a mania, now provide its viewers the latest daily quotes.

It is not so much the promise of this new peer-to-peer technology that operates with no central authority or banks. Nor is it interest in the fact that a collective network carries out the issuance of bitcoins and manages the transactions that have captured the attention of the public. There are a number of early adoptors who have become extremely rich off of the increase in value of Bitcoin and the so called alt-coin market. It is the dream of quick riches that is really driving the interest.

Whenever a technology begins to reach fever pitch, as we are seeing with cryptocurrencies,  a large number of self-proclaimed experts begin to appear. They are suddenly gifted with incredible prediction power. They know where the price will be in 3, 5, 10 and even 20 years. They happen to know that no government will be able to control it or stop it. They seem to know that it will eventually take over the world as the primary form of currency for all transactions.

However, these are not the only voices being heard from the rooftops. There are also those with equally impressive predictive powers. Those that seem to know where the top is. The point where Bitcoin ceases to move up, reverses and begins its long slide back towards where it began. Those  that seem to know that no solutions will ever be found to the current technological challenges that a decentralized digital currency currently faces. Those that seem to know that cryptocurrencies will never be a replacement for the platform of fiat currencies on which our economies currently function. They seem to understand all the weaknesses of these digital currencies and where their limits are.

Nassim Nicholas Taleb, author of “The Black Swan,” presents a convincing case on our inability to predict events with hard-edged analysis. At the same time he stresses to protect yourself from highly improbable events. Therefore, the first thing that should be done is to avoid the following 4 outspoken opinionated groups on the subject of Bitcoin. These groups are all supporting their own interests, which don’t always coincide with the interests of the individual.

1) The Financialists

The Central Bankers and their affiliate bankers around the world see themselves as the guardians of the global economy. In addition to providing a variety of services to the public that enable the economy to function rather smoothly on a daily basis, banks are still for-profit institutions and their principle goal is to generate profits. This is often done by way of complicated products with unsusual naming conventions. They control the money transfer and credit system, therefore, they weild a large amount of control towards the stability of the system. For this reason, they will not tolerate any outside technology that threatens their position. The initial reactions to Bitcoin were that of a pure fad. Further analysis sees them now trying to discover ways to regulate it, or create their own digital currency where they have the full control to profit from it. Their opinions are changing daily based on their confidence in how to manage its evolution. They are worried and rightly so as the initial concept of a decentralized digital currency would make many of their services redundant.

2) The Technologists

Bitcoin and the blockchain are based on technology. They have, not surprisingly, attracted the attention of the technology and developer community. They believe because it is based on technology, and they understand technology that it provides them with more powerful forsight. Once the value of Bitcoin began to rise, the startup community began to move into action and started developing a variety of ideas such as wallets, new exchanges, a variety of platforms etc. It has now become the hot area to be involved in. So hot that public companies that have nothing to do with Bitcoin or the blockchain have changed their names to incorporate the term blockchain only to see their shares rise immediately. The technologist are on a crusade and want you to join the crusade. However, it is wise not to forget that at one point there was once a product called a Betamax cassette which was superior to the competing VHS cassette only to lose out and be banished to history. Apple computer produced a much higher quality product and software than the PC and Microsoft option at the time. Apple computer only managed to acquire 5% of the PC market, much to the surprise of the followers who understood the value behind the technology.

3) The Evangelists

The leader of this group and one of the most vocal has been Andreas Antonopoulos. Antonopoulos became involved with Bitcoin in 2012. He has written two books on the subject, describing in detail the technical rules governing Bitcoin in a way that a novice could understand, and has given more than 200 talks (many of them free) about Bitcoin. Antonopoulos obtained his degree in Computer Science and Data Communications and Distributed Systems from University College London. With his help the Bitcoin evangelists have an ever increasing choir. Some of them understand the technology and find its possibilities fascinating. There are the bandwagon jumpers who want to join the club and fit in with the “cool crowd.” There are those that see it as a great way to transfer money around without the peering eye of the government, or truly a new medium of exchange not governed by any central authority.

Then there are also those who have dreams of striking it rich. Ironically, Antonopoulos, after having spent the last five years of his life traversing the globe and educating people about Bitcoin found himself not only NOT taking advantage of the run up but found himself in debt, until a wrath of Bitcoin evangelists donated to his cause. This came just at the moment when he was questioning what he was doing it all for.

4) The Governmentalists

Governments are the farthest from being Bitcoin advocates. This is not because they don’t believe in digital currencies. In fact, they would garner more control by ridding the economy of hard currency and make everything digital. This would enable them to gain tighter control of the money supply or increse their efficiency of tax collecting. What they don’t appreciate is loss of control. The idea of a collective decentralized managing transactions and digital currency issuance is an idea that they will never accept. Why? They require a centralised authority (which is them). We wrote about the ways in which governments could shutdown cryptocurrencies. It is, therefore, no surpise that they are fighting vehemently against the idea.

So who should you listen to? This is one of those situations where you must truly take matters into your own hands. You have to acquire the knowledge necessary, educate yourself and decide for yourself how this new system of digital currency could affect you personally. This means choosing your information sources carefully. If you do listen to any of these groups, be cynical and don’t take what they say at face value. Double check and do your own research. Depending on who you speak to, you will be labelled as blind if you don’t buy into it or labelled as an idiot if you do. In the end, it is the market as a whole who will ultimately decide the fate of cryptocurrencies.

The Hutch Report

2017 Wealth Management Review

By | Business, Economics, Money

At the beginning of 2017, The Hutch Report completed a “Smart Money” analysis to highlight how the smart money was looking at the markets for 2017 and beyond. It was meant to provide a high level overview based on an aggregated synthesis of the macro views of the world’s Top 50 largest wealth management institutions.

Now we are looking back on all the forecasts made by these “Smart Money” managers and institutions to see how accurate they were in predicting the future or if they were just exhibiting an “Illusion of Understanding.”

Central Banks and Monetary Policy

Federal Open Market Committee (FED) 

The consensus (40%) of wealth management firms predicted two hikes in 2017 of 25 bps each hike which would bring the Fed Funds target rate to 1.25%. Roughly 8% predicted three rate hikes. No precise forecasts were provided as to how much or when but of the wealth management institution outlooks reviewed, they all indicated an expectation that Central Bank monetary stimulus policies (eg. quantitative easing) would start to weaken.

On December 12-13 the Fed raised rates for a third time. Only 8% of our wealth management professionals got it right.

The FOMC did announce a tapering plan at the September 2017 meeting and have started in October by letting $10B in bonds mature each month and will slowly increase that number to $50B. As a reminder, in 2008 the FED balance sheet was $800B. It is now at about $4.50T as a result of QE.

European Central Bank (ECB) 

Taper would commence second half of 2017. One dissenter stated the ECB would be unable to discontinue QE.

The ECB did not make any rate changes for overnight credit in 2017 and that rate remains at 0.00%. They did not commence tapering in 2017. However, they did signal in October of this year that they would start tapering in 2018 by cutting in half the monthly purchases from the current rate of €60B to €30B.

The People’s Bank of China (PBOC)

The PBOC will continue to stimulate demand through adjustments of the reserve requirement ratio (the amount of money that the banks must hold as reserves).

In September of 2017 the POBC announced that in 2018 the reserve requirement ratio would be lowered for certain banks from 200 bps to 150 bps. In return for the reduction the banks must meet certain requirements for lending to small business, agricultural sectors, entrepreneurship and education.

Changing of the Guard

The next two years, 2018 and 2019, we will see some changes to the heads of some of the world’s most influential central banks.

Most people are by now well aware that in February 2018, Yellen’s term as Chair of the FOMC expires and Trump has nominated Fed Governor Jerome Powell as the next Fed chair. The post of the Fed chair is subject to Senate confirmation. The Senate Banking Committee has approved Jerome Powell which clears the way for the Senate confirmation vote.

At the Bank of Japan the current Governor is Haruhiko Kuroda and his term will be expiring in April 2018. Current headlines indicate that there is a strong likelihood that his term will be renewed as the Japanese government has expressed satisfaction with the BOJ’s policies under Kuroda.

In 2019, the terms for Mark Carney at Bank of England (BOE) and for Mario Draghi at the European Central Bank (ECB) will expire. Due to the bylaws of the ECB which state that the term of the ECB presidency is for an eight-year non-renewable term the ECB has to find a new president and it cannot be Draghi. It remains to be seen what will happen with the BOE Governorship as Carney has been seen as a strong leader.

Governments and Fiscal Policy

The EU

The consensus for 2017 was that the EU would experience a modest recovery but mitigated by concern, seen to be short term, on political risks due to rising anti-EU and populist sentiment but that this would be limited and most likely would not extend past the UK.

The EU economy so far has actually exceeded forecasts with real GDP growth expected to be 2.2% for the year compared with earlier forecasts of 1.7%.

Everyone was waiting with baited breath to see if populism and a BREXIT, separatist, type mindset would spread via the 2017 elections in 2017 in Europe – specifically in the Netherlands, the France and Germany. However, that did not come to pass and more centrist candidates won those elections. However, this did not mean that the populist and separatist parties went away. Even though Merkel won in Germany for a fourth term, the far-right, anti-immigration party in Germany, the AFD, won seats in the Bundestag with an historic breakthrough for the party and it is the first time in 60 years that an explicitly nationalist party sits in the Bundestag.

Meanwhile in Spain, there was a big push for Catalonia to separate from Spain. While the independence movement was effectively stifled the issue is far from being resolved as manifested by pro-independence parties renewing their majority in the Catalan parliament in the regional elections just held at the end of the year on December 21.

USA

The consensus for 2017 was that the deflationary policies of the incoming administration with Republican majority in both houses of congress, will be positive in the short term for US equities (promises of tax cuts, repatriation of foreign US earnings and higher public spending plus a pledge to invest over $1 T in US infrastructure) Caution for the longer term with potentially greater inflationary pressure and the impact of populist and protectionist ideals.

During the course of the year and up until December, the Trump administration had not succeeded in passing any legislation. This caused some doubt during the year whether the administration would be able to succeed with the measures they had promised. The Trump administration finally did succeed in passing a much contested tax reform bill which was approved by the senate in December and then passed into law and signed by Trump on December 22. Much debate is still raging on whether the new tax bill, which among other sweeping changes cuts corporate taxes from 35% to 20%,  will be effective in repatriating corporate money back into the US and whether this will translate to investment by those corporations into the US economy.

With regards to other campaign promises, notably the border wall, while many prototypes have been proposed there is still no clarity on how the wall will be paid for or what the next steps really are. Meanwhile the $1 Trillion in infrastructure spending does not have any more clarity either. In October of the year, Trump pivoted from a stance pushing for private investment and is now looking towards the treasury which would possibly imply further borrowing and using proceeds from taxes on gas.

Emerging Markets

Despite concern on a potentially rising USD along with interest rates which would negatively impact  emerging markets, especially countries with a majority of their exports to the US like like Brazil and Mexico, the wealth managers were still predicting higher GDP growth in BRIC countries in 2017.

The final GDP rates are not yet available for 2017 however so far it can be said that: Brazil has exhibited modest GDP growth so far this year and slightly surpassed initial forecasts, while   Mexico, which started off the year well in the first half of the year has not faired so well in the second half of the year due to disruptions from two earthquakes, subdued consumer spending and inflation. NAFTA negotiations are still continuing with the US and are expected to continue in 2018.

Japan

The majority of wealth managers estimated that Trump policies would help drive up the USD and provide a tailwind to Japanese fiscal policy would also weaken the Yen which in turn would strengthen the Japanese economy in 2017.

Despite a stronger Yen against the USD, Japan saw stellar export performance, supporting manufacturing activity, as highlighted by December’s PMI figure, which hit a nearly four-year high. Investment also benefited from resilient global growth, with business confidence in Q4 climbing to an over one-decade high. So the Japanese economy strengthened but not for the reason’s outlined by the wealth institutions.

Inflation Outlook

The view was that Inflation would increase slightly in developed markets and despite the big question mark whether the central banks would be able to keep inflation in check following the massive reflationary measures they have taken the consensus seemed to be that inflation would be kept in check.

Higher inflation was forecasted in Asia due to less Asian central bank intervention.

For the developed markets, the wealth institutions basically got this one correct in their outlooks for 2017. The inflation rate in both the US and Europe increased the most in the first half of the year and is still trending slightly higher than it was at the beginning of the year. Concerning inflation in Asia, directionally the wealth management outlook for 2017 was correct. Whether or not the reasoning was correct is another story. The theory was that inflation would be higher due to less central bank intervention than in developed markets. This is a subject worthy of debate and whether or not less intervention is even true. For example, the Chinese central bank, the People’s Bank of Chine (PBOC), is suspected to have intervened several times in 2017 in order to keep the yuan propped up.

Bonds

The historical experiment of quantitative easing in the US, Europe and Japan has seen unprecedented buying of bonds, driving yields down to historic lows. However, with the European Central Bank (ECB) and Bank of Japan (BOJ) running out of bonds to buy and facing the unintended adverse consequences of negative rates (for banks and insurers), 2017 was seen to be the final year for quantitative easing and negative rates. It was believed that political resistance to fiscal expansion would weaken, particularly in Japan. Therefore, the consensus was that there would be nowhere for yields to go but up.

The yields on the US 10yr began the year at 2.45%, however, despite 3 rate increases from the Fed, the 10yr yield spent most of the year lower, closing at 2.405%, going against the consensus view of higher yields.

The Eurozone 10yr government benchmark yield began the year at 0.86%. It spent most of the year above this rate and closed the year at 1.05%. German 10yr yield began at 0.189% and finished at 0.427%. When referring to the Euro Zone the consensus got it right.

Japan continues to confuse many. In July, The Bank of Japan offered to buy an unlimited amount of JGBs, as it sought to put a lid on domestic interest rates pushed higher by the broad sell-off in developed market bonds. JGB 10yr yield began the year at 0.046% and finished at 0.048%, essentially staying flat.

Equities

In regards to public equity, a large majority, nearly 85%, of those with a positive outlook on equities were positive on headroom in the US equity market.  Following the US equities market there was no other region or country for which the reports reviewed indicated a majority positive outlook in general for equities, however, close to 50% were favorable on Japan, followed in this order, by Europe, Emerging Markets and then Asia.

The cap-weighted S&P 500 gained 19.42% on the year, whereas the average stock in the index was up less than that at just over 18%. Regardless, 85% of the smart money managers were correct in forecasting higher equities for 2017.

Close behind, the Japanese Nikkei gained 19.10%, where only close to 50% envisioned such a strong performance.

The Euro Stoxx 600 index closed up roughly 7%.

Currencies

There was a clear and overwhelming agreement that the new Trump administration policies would be bullish for the US dollar. In addition to the US government policies, it was also believed that the Federal Reserve would begin to increase interest rates, which would in turn also be bullish for the US dollar.  Where there was lack of vision was to how high the US dollar would rise, but it was expected to rise throughout the year of 2017.

The view regarding the Chinese Yuan (also recognized as the Renminbi) was that it would remain weak against the USD for some time. However, the majority was expecting the Yen to depreciate further against the US dollar into late 2017.

There were a number of elections coming up in Europe and that was expected to increase risk and put downward pressure on the Euro. The expectation was that it would reach parity with the US dollar.

Not everything worked out as neatly as planned by our smart money managers. 2017 was a nasty combination of buy-the-rumor-sell-the-news for the Greenback. Action on Fed tightening and fiscal reform, more weight on disappointing data versus upbeat results, and the “Trump effect” left the US dollar sliding for most of the year.

The 2016 close for the EURUSD cross was 1.0517, however the close of 1.2004 destroyed the dreams of all those banking on parity.

The USDCNY cross began the year at 6.96 and ended at 6.50. The US dollar’s unforeseen slide  helped to bump up the Yuan against the USD going against the view of a weaker Chinese Yuan for the year.

Last but not least, the US dollar lost 3.69% to the Japanese Yen, going against the majority view that the Yen would continue to depreciate against the US dollar in 2017

Commodities

80% of the researched wealth institutions believed that the commodity cycle had based and was set to recover, however, the market structure remained a challenge and fundamentals across many raw materials continued to point to concerns of an oversupply. For this reason, there was not an overly bullish view on commodities but a wait and see neutral one.

Concerning Oil, we found a range of forecasts from $45 to $65 a barrel with no clear majority on any one price point. Oil started the year at $52.46, fell to as much as $42 and rebounded to end the year at roughly $60 a barrel.

There was no clear agreement when it came to Gold, however, as the majority linked the performance of gold to the USD, and that same majority expected the USD to rise (indicating Gold would fall, or stay range bound at best) were all off the mark. Gold ended up roughly 13% beginning the year at $1,150oz and ending the year at roughly $1,306oz.

New Alternative Investments

What a difference a year makes! Bitcoin was a curiosity at most at the beginning of the year, however its stubbornness to sell off for any extended period, while it continued its meteoric rise, forced wealth managers to take notice.

It began the year at roughly $984 and continued to rise to $19,211 before rounding out the year at $12,610, beating any other asset class (although the debate is still raging about whether or not Bitcoin is an asset or other). Regardless, Bitcoin is now something to be reckoned with and will not be taken so frivolously as it was in the beginning of the year.

Along with the rise of Bitcoin came a host of other Alt coins and ICOs (initial coin offerings), however, as far as professional money managers are concerned, Bitcoin is the main act for the moment until proven otherwise.

We also mentioned Bitgold in our report which was the idea of a cryptocurrency backed by the equivalent amount of gold. It was believed that this would stabilize the volatility seen in pure cryptocurrencies and provide them with an air of respectability. However, it is still too early to know if this will take hold and for the moment this concept is not really of interest to the professional investment manager.

Our special report on Gold Backed Cryptocurrencies supported this lack of interest as we researched all the principle players in the area, large and small and found them largely lacking in many areas.

In Conclusion

2017 was not an easy year for our wealth management institutions in many respects. There were no great winners or losers.

Will 2018 prove to be any easier? We don’t know, but if the smart money is having such a difficult time making sense of all these moving pieces you can bet that the dumb money is at a complete disadvantage (unless they bought and held Bitcoin, which currently would make them look like the smart money….for the moment).

A principle lesson to be learned is that all these forecasts that appear in these glossy yearly outlook reports, quarterly reports, weekly reports and minute by minute reports that continue throughout the year on your local financial media networks, by all these institutions that manage the largest fortunes are just that, forecasts.

Everybody speaks in their best interests which makes following these prognostications and forecasts all the much more difficult and more often than not puts you, as an investor, at a disadvantage because you are more likely than not to be buying from those who are selling (which happen to be the same people which have advised you to buy). Therefore, don’t listen to the smart money, follow the smart money.

The Hutch Report

Bitcoin and the Bandwagon

By | Cryptocurrency, Money, Psychology

Bitcoin and the blockchain have been around since 2008 when the elusive Satoshi Nakamoto presented his/her white-paper to the world outlining its structure. Since its core is based on cryptography and mathematics, in the beginning it only attracted the attention of those in that area of research. However, because it was proposing a new medium of exchange that could not be altered and promised anonymity, the dark side of commerce quickly joined in. From here, the value of Bitcoin has begun to increase, as has the attention. After 9 years in existence, the mainstream media has begun to chime in and before you know it, Bitcoin charts and quotes have been all over the news.

The other day, my father-in-law asked me if I heard about the action in Bitcoin. He used the term as loosely as he would “Google search,” however I knew that his understanding of what Bitcoin actually was, was severely limited. My neighbor stopped to chat and told me her son (15 years old) was having a friend over. I said, “To watch a movie?” and she told me, “No, to trade Bitcoin.” She had provided her son with a few hundred dollars to trade! Last night I was in a restaurant in town that I know very well. It is a small place with the tiniest kitchen. I popped my head in to say hello to the chef. The first thing he said to me was, “Hey, did you buy any Bitcoin lately?” At that moment I realized the wagon was getting very full.

The chance that people begin to adopt certain ideas or choices tends to increase when they realize that other people have adopted similar ideas and choices. This is a human cognitive bias known as the “Bandwagon Effect.”

In 1848, Dan Rice, at the time a famous and popular circus clown, decided to use his bandwagon (a wagon that carried a band during parades) and its music to gain attention for his political campaign appearances. His campaign became more and more successful and this obviously attracted the attention of other politicians who fought for a seat on the bandwagon, hoping to be associated with his success. Bandwagons eventually became a standard centrepiece in political campaigns and the phrase “jump on the bandwagon” was born.

It is a powerful principle that is used constantly in marketing. The concept describes how the increasing popularity of a product or phenomenon will encourage more people to “jump on the bandwagon.” We see it everywhere. #America’s No 1 choice, #the fastest selling product, #most wished for, #most gifted or the myriad of top 10 lists that we see everyday.

The tendency to follow the actions or beliefs of others occurs because individuals directly prefer to conform, or because individuals derive information from others. Normally, when an individual makes a “rational choice” (see our article on the Rational Price here), it is based on the information they compile from various sources with which to come to a decision. However, as information cascades, or when people start passing on information they assume to be true, but cannot know to be true, based on information on what other users are doing, they will ignore their personal information signals and follow the behaviour of others.

The phenonmenon of Bitcoin and cryptocurrencies does not stop with the bandwagon effect. The speed at which it is moving, where fortunes are being made and lost in the most unlikely areas of society has stirred a variety of other cognitive biases into action.

Closely related to the bandwagon effect, and becoming clearly evident in the cryptocurrency mania, is the “fear of missing out” or FOMO. The fear of missing out is a type of motivation that is described as a drive not to miss current or future opportunities. It’s associated with a fear of missing chances for competitive advantage, rewarding experiences or financial opportunity gains. It is considered a common and strong form of motivation that can explain a wide range of human behaviors. However, as with other similar biases,  the fear of missing out can result in excessive or compulsive behaviour and poor decisions.

Robert Cialdini, author of the widely popular Influence: The Psychology Of Persuasion, popularized the term “Social Proof.” The Social Proof Theory, affirms that a person who does not know what the proper behavior for a certain situation is, will look to other people to imitate what they are doing and to provide guidance for his actions. Uncertainty is the fuel that activates and feeds the mechanisms of social proof. This is especially fitting in the case of cryptocurrencies, as the technology and mathematics behind them is not so simple for the average person to immediately grasp. Therefore, social proof becomes more influential when the surrounding people are perceived as particularly knowledgeable about a situation or are even just slightly more familiar with the situation than the observer is.

As the price of Bitcoin and a thousand other cryptocurrencies have risen to lofty levels, so has the debate around what cryptocurrencies respresent.  Are they a medium of exchange? Do they have true value? Do you have to pay taxes on gains? Are they something else other than a tool for speculation? This debate has come to just about every financial media news outlet; CNBC, FOX, Bloomberg or CNN Money where they present daily their panels of financial experts. So where better to gain an understanding about cryptocurrencies.

The trap that many viewers are falling into is known as the “Authority Bias.” The Authority Bias is a where you defer to any position of authority to either dismiss or confirm evidence. The thought process follows the following reasoning pattern: Person X is an authority in a particular field. Person X says something about a  topic in their respective field. Person X is probably correct because they’re an expert. Because of this reasoning, the Authority Bias maintains that if you don’t know something better yourself you will likely trust the advice or information from someone who is considered an expert in that field.

The Hutch Report has been following Bitcoin and other cryptocurrencies for a while now. We recently completed our current feature report related to Gold Backed Cryptocurrencies, which can be downloaded here. We don’t profess to be experts regarding this technology but we do follow it with interest. We believe that, although a large number of opinions exist about where all these cryptocurrencies will be in the future, nobody really knows. Nobody is even certain about true identity of the originator, Satoshi Nakamoto.

We are currently living in unchartered territory so it is up to each individual to protect themselves, keep their bias in check. Don’t blindly follow and do your best to inform yourselves.

The Hutch Report

Computer Generated Headlines – Read All About It!

By | Business, Money, Technology

Everybody seems to be lacking time in what we call the New Economy.  In the past few years there has been a wave of innovation in order to address this. There are now more productivity tools and apps on the market than ever before. We have tools to help us stay focused better, improve our channels of communication with friends and co-workers, create projects easier, take better notes, keep your notes better organized, or how to identify distractions in your life so you can cut them out.  All these tools are meant to save you time out of your busy day to do the things you love. Still, nobody seems to be finding that time.

In addition to a lack of time, we need to deal with the massive amounts of information that we are presented with on a daily basis. We spoke about this here (The Hutch Report). There are thousands and thousands of articles being produced and published every minute and there is just not enough time in the day to read them all, along with all our other activities. In order to filter out all the noise we skimm through the headlines hoping to gain an understanding of the big picture.  The Skimm, (https://www.theskimm.com) does just that by providing editorial contents and headlines targeted to women.  Authors and publishers know this so it is imperative that they create the perfect headline that will catch the reader’s eye, also known as click bait, and hopefully tweak their attention enough to where they read the full article.

But wait, this is the New Economy and anything that can be automated and made more productive will be. This includes headlines. I discovered this quite by accident well before there was a New Economy, smartphones or social media.

When I began getting interested in the financial markets I used to spend a lot of time reading all kinds of newspaper articles.  I rarely missed the Wall Street Journal’s daily overview of the previous day’s market action. As time went on I started to notice that there was one headline that would pop up extremely often, “The Dow ends lower on profit taking.”  I didn’t understand the meaning of the headline. How would the writer of the article even know that this was profit taking? When I took losses on my investments, headlines such as that began to get me annoyed.  I thought to myself, “Doesn’t the Dow ever end lower because investors have been forced to take losses?”

I paid more attention to the wording of these headlines and as I did I started to see more and more contradictions.  I found it curious that no matter what the financial markets did, all these newspaper journalists seemed to have an understanding as to why it was, and managed to encapsulate that in a pithy headline. I began to question the validity of the information I was consuming.

One day by chance I met someone who was working for the Dow Jones Newswire.  I jumped at the opportunity to gain more insight as to how these journalists managed to analyze the day’s activities on the financial markets and identify the catalyst for their movement in such a short amount of time.

The representative from Dow Jones Newswire told me that the markets were constantly changing so it was far more convenient to have the computers generate the headlines.  I learned that they have a database of headlines that are related to any general world news events that may be happening during the day. This could be anything from a company takeover, to gold going up, to gold going down, to oil going up, or to the rumblings of war in the Middle East. For example, if the market drops off the open and oil has gone up, the morning headlines may read, “Dow falls on higher oil prices”. During the day, however, it is not uncommon to have the market reverse and end the day up.  The headlines would then read, “Dow rises on higher oil prices.” These are the contradictions that I recognised that began to show up daily.

This was a revelation because I now understood that the headlines I was reading were actually completely arbitrary and computer generated. In my mind, this reduced  their “news” value to essentially zero because it was not providing me with the big picture overview I wanted.

From the time of my discovery that the Dow Jones Newswire was using a headline generator, the amount of content being produced has gone up exponentially. The ability to make sense of it by way of new technologies such as artificial intelligence has in turn become much more sophisticated. A North Carolina-based startup named, Automated Insights, founded in 2007 and backed by the Associated Press, Samsung and Steve Case built technology to automatically take raw data and translate it into narratives that look like they’ve been written by a human. It uses a technology called Wordsmith to generate stories. Typically, Automated Insights works with large customers to create the templates that the Wordsmith software fills in. The company claimed it was producing hundreds of millions of pieces of content for customers that included Yahoo and Microsoft.

Wibbitz is an AI-driven production software that USA Today has used to create short videos. It can condense news articles into a script, string together a selection of images or video footage, and even add narration with a synthesised newscaster voice.

The large media companies are using all options to become more efficient and more profitable. So now, not only are headlines computer generated but we are moving into an age where complete articles will be written by computers.

As explained in his book “The End of Big”, Nicco Mele explains that it is not all doom and gloom for the future of journalism and journalists. Much of the fact finding mission is now going direct by way of user generated media. The proliferation of blogs and other small grassroots news and opinion Web sites are undercutting the current economic model of news by fragmenting audiences. A segment of the market, such as, The Skimm, is making an effort to “Humanise” headlines and provide the reader with as much information as possible in an efficient manner.

The big challenge facing us now is that as these computer algorithms get more sophisticated, it is getting more and more difficult to identify what is computer generated and what is human generated. If your goal is to be more productive and save time by glancing over headlines in order to understand the big picture, you may be putting yourself at a disadvantage as these headlines may not be providing you the complete picture. Your best bet is to carefully choose your information sources, and that includes companies that propose to summarize the daily news for you, such as Bit·of·News. But beware!  Bit·of·News is powered by PyTeaser, a news summary algorithm that ranks sentences in a news article according to how relevant they are. The top 5 sentences are used to form a “summary”.

In the end, you may find yourself reading a computer generated summary of a computer generated headline that has been constructed from a computer generated article. Although, for the moment as far as I know, the one thing that is not yet computer generated is the actual event being written about!

The Hutch Report

The Digitisation of Fraud

By | Cryptocurrency, Law, Money, Technology

Whether we speak about the new economy; the old economy or any economy, fraud is still fraud. It is the wrongful or criminal deception intended to result in financial or personal gain. Yet even though there has been a large amount of publicity surrounding some very high profile cases of fraud nothing seems to change. Auditors and accounting professionals seem to remain impotent when it comes to fraud detection.

The truth is, the audit of traditional financial statements were never designed to detect fraud. The audit is simply a process of checking a company’s math and application of accounting rules. This is probably why it has been so prevalent in large corporations in spite of the fact that they have an army of accountants from the largest auditing firms scouring their books yet no cases of deception to show for it.

According to the findings in the “Report to the Nations on Occupational Fraud and Abuse” study released by the Association of Certified Fraud Examiners in 2014, the higher-ranking the fraudster was, the greater the losses. In addition, financial fraud is more difficult to uncover because the perpetrators have less of an emotional connection to what they are doing than they do for other types of crime. The fact that they are not actually touching money as opposed to fudging documents, they feel less guilty of committing a crime.

There seems to be less leniency towards drug dealers and petty criminals as opposed to, say bankers, but the truth is financial fraud has destroyed just as many or more lives through the theft of millions taken from shareholders and pensions plans.

The report estimated that the typical organisation loses five percent of its revenues each year to fraud. That would work out to a global impact of $3.7 trillion, however, it is also believed that there are so many more cases that are not discovered.

So now we find ourselves living in a digital world with the increasing development of the Internet and our dependence on it. We have seen the introduction of the blockchain with which has come the proliferation of a number of crypto-currencies chief among those being Bitcoin.

With the advent of a new technology that has the capacity to disrupt our financial system, it is not surprising that with it comes a new breed of criminals. Cybercrime is already costing the U.S. economy as much as $120 billion a year and as much as $1 trillion globally, according to a study released in 2013 by McAfee and the Centre for Strategic and International Studies. Seeing that it is so difficult to regulate Bitcoin, it has been the tool of choice for these cybercriminals.

It is not surprising to see so many come out and chastise this new technology, especially those with a weak understanding of its merits. Equally not surprising is the large number of financial industry participants at the forfront of these critisisms. Ironically it is those same participants who have already been responsible for billions of dollars of fraud in our financial system.

The truth is, it doesn’t matter what the weapon is. If you kill somebody using a gun, knife, poison or your own hand, the end result is that they are still dead. If you steal money from someones purse, removed the funds from their bank accounts, knowingly overcharged them for services never rendered or expropriated funds via Bitcoin, the result is the same.

Liberty Reserve was founded in Costa Rica by Arthur Budovsky. Through his website it was possible for anyone to transfer money with very little regulation. The only required details were name, e-mail address, and birthday. Liberty Reserve never actually handled the funds, as it converted the fiat deposits into Liberty Reserve Dollars or Liberty Reserve Euros, whose values were pegged to the value of the US dollar and euro respectively. This made it ideal for funneling criminal funds. The authorities eventually closed in on Budovsky’soperation and shut it down. In January 2016, Budovsky pleaded guilty to money laundering and admitted that he had secretly moved at least $122 million.

When it comes to Bitcoin, the case that is cited the most is that of the Silk Road bust. In the Silk Road case the federal government had seized more than $33 million worth of bitcoin from the computers of the site’s alleged founder, Ross William Ulbricht. It is believed that the operation generated roughly $1.2 billion in sales over three years. Tracing that money and recouperating it would be deemed as next to impossible.

We can compare these two “digital” cases with that of Enron. Enron Corp. was essentially an energy trading company that reached dramatic heights, only to face a dramatic collapse. The story ended with the bankruptcy of one of America’s largest corporations. Enron’s collapse affected the lives of thousands of employees and shook Wall Street to its core. At Enron’s peak, its shares were worth $90.75, but after the company declared bankruptcy on December 2, 2001, they plummeted to $0.67 by January 2002. Enron shareholders filed a $40 billion lawsuit although only ended up receiving limited returns from the lawsuits, despite losing billions in pensions and stock prices. This was the largest bankruptcy in US history until Worldcom a few years later.

The means and methods were different in these cases but the results were the same. Fraud is fraud.

The Hutch Report

Tools for the Crypto Millionaire

By | Cryptocurrency, Money, Technology

With Bitcoin prices and cryptocurrencies surging to all time highs the hype and noise is reaching fever peach.  Unbridled enthusiasm on one side and unbridled doom and gloom on the other side. With that said, those who have not invested are suffering from FOMO – the fear of missing out. Many readers continue to ask us how does one go about investing in cryptocurrencies. We have therefore put together a list of those necessary tools to get you started in building your cryptocurrency investment stash for the future.

We have also heard, firsthand, recent stories of people now placing their entire retirement or IRA savings in Bitcoin. For anyone in their twenties and this amount is small, why not … there is time in life to recover before retirement in the case things do not go as hoped. For anyone in middle age or older – well, this is probably a bit foolish. A common sense advice purported by serious and ardent advocates for crpytocurrencies is to invest 1% of assets into cryptocurrency. If it does well, great. If the whole thing comes crashing down, losing 1% would not be a disaster. As a reminder, “hope” by itself is not a great investment strategy.

In addition, the fact that cryptocurrencies are decentralized means that you are responsible for your cryptocurrency investments. If you should lose or have them stolen, there is no central authority which you can turn to. Therefore, you need to inform yourself on the proper security measures to take in order to protect your cryptocurrency investments. We have therefore provided three of the best hardware wallets on the market to help you to do so.

We would like to remind all readers that this website and content is produced for general interest, is not specific to you, is for entertainment only and is not intended to provide nor constitute financial advice. In full disclosure, the authors may or may not be holding positions in any of the vehicles mentioned. Prior to making any investment decision you should undertake your own due diligence and/or seek the advice of a qualified and registered securities professional. With the preceding in mind, listed below are some of the websites and platforms that some of our readers have indicated they are using:

Market Prices and Market Capitalizations

Coinmarketcap  is probably the most trusted comprehensive index of crypto market prices capitalization ranking as well as which coins are being traded on which exchanges. The nice thing about this site is that you can easily select which fiat currency in which you would like to see the prices compared. Do note that the prices listed are the average prices across exchanges. It is possible on this platform to drill down and see the prices on each specific exchange as well. The astute individual would remark the discrepancy of prices on the different exchanges and see an opportunity for arbitrage. However, in this case one would also want to pay attention to volumes and liquidity which would impact the ability for arbitrage.

Cryptocompare also provides a comprehensive listing of cryptocurrency market caps and prices and allows different currency comparisons.

Cryptocompare USD for a listing of prices as compared to US dollar.

Cryptocompare BTC for a listing of prices as compared to Bitcoin (BTC)

Cryptocompare EUR for a listing of prices as compared to Euros.

Coinvision provides AI-powered alerts for cryptocurrency market news.

Exchanges and wallets

In order to buy a cryptocurrency you have to have an account on one of the exchanges that allows trade in the currency. Cryptocurrencies can be traded similarly to stocks including features such as limit orders. Only a handful of currencies can actually be bought directly with fiat currency such as US dollars or Euros. The most common denominator is BTC. BTC can be bought for US dollars or Euros and then BTC can be used to buy the other currencies.

Some of the exchanges also provide wallet services and vice-versa.

In choosing an exchange we would recommend choosing one that has volumes otherwise you may suffer liquidity issues. Some of the most popular Bitcoin and cryptocurrency exchanges are:

Poloniex : A US based company, Poloniex allows trades in about 107 different cryptocurrency markets, with most volumes from Ripple. Ethereum and Litecoin.

GDAX : GDAX is a US based company, and as of this writing only trades in Ethereum, Bitcoin, and Litecoin. It does facilitate fiat currency purchase in USD, EUR and GBP for Bitcoin.

Kraken :  This is a US based exchange that allows trades in about 40 markets and does facilitate USD and EUR purchases for Bitcoin, Ethereum, Ethereum classic and Litecoin as well as a few other currencies.

Korbit : This is a South Korean based exchange currently only trading in Ethereum, Ethereum Classic, and Bitcoin and allows fiat purchases using South Korean Won.

Bitstamp : This company is based in Slovenia and London and trades in Bitcoin, Litecoin, Ethereum, Ripple and soon Bitcoin Cash.  They facilitate fiat currency purchases in USD and EUR. For purchasing Bitcoin via Bitstamp it works very well for a variety of options including credit card, however, credit card purchase of Bitcoin do carry a 2.5% fee. SEPA (European standard) wire transfers are efficient with Bitstamp.

Bittrex : This is a US based exchange that supports over 190+ cryptocurrencies. This is the platform recommended by many of our readers. Bittrex does not facilitate direct fiat currency purchases. What some of our readers do is they buy Bitcoin on one of the other platforms that allows purchases in fiat currency and then they send the Bitcoins to their Bittrex wallet and then purchase the other currencies using their Bitcoins. The same process would be followed in reverse to extract fiat currency.

Coinbase : A US based company, Coinbase is a wallet for Bitcoin and Ethereum. It also facilitates an exchange and allows purchases for both of these cryptocurrencies in USD. Coinbase also enables the quick purchase of Bitcoin by linking your bank account  or credit card account. Credit card is a more expensive option and you will pay a 2.5% fee for the transaction. Currently, Coinbase only allow a maximum purchase of $50 worth of Bitcoin a week using a credit card so if you want to buy more you would probably need to link your bank account.

Xapo :  A US company, Xapo is also a wallet with exchange services as well as the ability to link a debit card. The debit card feature is pretty cool, it allows you to use your Bitcoin holdings for everyday spend, in USD for example, at any stores that accept normal debit cards. A main feature of Xapo is that it is probably the most secure online wallet in the industry. Their hardware is put together under the eyes of security and their servers are stored in protected vaults hidden in the Swiss mountains.  Xapo is good as a wallet, however, if you want to buy Bitcoin Xapo may be an expensive choice. The minimum purchase amount, whether credit or debit card, that Xapo will allow is $10’000 purchase.

Hardware Wallets

Trezor is a hardware, USB wallet that allows you to easily and securely store your Bitcoin and other supported cryptocurrencies yourself. There are several hardware wallets, Trezor is one of the most popular and has already, in the relatively short life of cryptocurrencies, proven itself at navigating very well the complex world of blockchain forks. In addition they are integrated with many of the major exchanges like Bitstamp (mentioned above) which makes it super easy to securely store your Bitcoin offline but move them back in within a few clicks when you want to trade or transact.

Ledger Nano S is a another hardware wallet that stores Bitcoin, Ethereum and other supported cryptocurrencies.

Digital Bitbox is a minimalist bitcoin hardware wallet packed with security and privacy that allows you safely hold and spend your coins with peace of mind. This is a very easy to use is a plug-and-play wallet also with second-factor authenticator that combines the highest security of cold storage with the convenience of software wallets.

DIY (Do-it-Yourself ) and other Wallets

The bitcoin.org site lists several bitcoin wallet solutions (https://bitcoin.org/en/choose-your-wallet). If you become adept at a specific cryptocurrency you may want to download the wallet specifically for those alternative currencies from the organization directly. For example if you are into PIVX, at https://pivx.org/ you can download the defacto PIVX wallet for your operating system directly. The advantage of using the wallet provided by the organization is that you can potentially also benefit from mining or staking and earn extra coins from the wallet. This is the case with the PIVX wallet which allows you to earn PIVX by keeping your wallet on and keeping PIVX in it. Whatever you do, be sure to make back-ups of your wallet and where possible use 2 or even 3 factor authentication.

A parting word…

You can keep your crypto-money on the exchanges directly or store it in a wallet.  Exchanges are not as secure and may not support forks when they occur.

We hope you have found this article useful. If you did, remember to sign-up for our newsletter by registering via the “subscribe” link at the top and to follow us on Twitter or Facebook just click their icons below. Check out the suggested reading material as well if you are interested in learning more.

The Hutch Report

The Illusive Stock Market Crash

By | Economics, Money

On October 19, 1987, 30 years ago, the stock market dropped 22.6%, with volume at 604 million shares doubling that of the previous record. So, how illusive are these crashes and how often do they happen? The panic of 1901, the panic of 1907, the depression of 1920-21, the crash of 1929, the Brazilian market crash of 1971, the crash of 1973-74, 1998 LTCM debacle, 2000 dotcom bust, 2007-08…..and on and on. I have only mentioned a few yet in spite of what history tells us, less and less people today think that it is possible for the stock markets to crash again. Why would we think this? Margin debt is at all time highs, consumer confidence numbers seem to be quite bullish in spite of what the retail sector tells us.

So are things really different this time? Will markets never go down again? In order to understand this we can look at what has changed since the last downturn in the market. 1) The Central Banks have created over $4 trillion of liquidity (more if you add up all the central bank interventions), so investors have come to believe that no matter what happens the central banks will be there to pick up the pieces and just print more money. The word for this is moral hazard. If you invest in something and believe that if you lose, somebody will support you financially, are you going to take less risk or more risk? The answer is you are going to take more risk. You would be stupid not to, seeing that you can’t lose no matter what you do. 2) High Frequency Traders (HFT) have increased in size and number. They now make up the largest portion of volume traded on the stock exchanges. This was not the case in 2007-2008 and before.

The next thing to understand is value. What is the value in the market that makes it go up? We can simplify this with an example. Let’s say a special doll has come out on the market. It cost $5 to manufacture and sells for $10. They start to sell out fast. In fact, some people buy them and resell them which pushes the price up. That pulls more people into the market which pushes the price up even more. Now you are paying $20 for the doll. In order to buy a doll you need to find somebody to sell. As long as the price goes up, people get greedy and hold out for more, which makes the price go up even more.

There is a percieved value that creates demand and pushes the price up but what happens in the inverse? Let’s imagine that the doll was made in China and suddenly news came out that the paint was toxic and making people sick. Suddenly nobody wants to buy. The price goes from $20 down to $3. The value just evaporates. In fact, the doll becomes worthless and drops to 0. Nobody wants to buy because the percieved value is 0. Who wants to buy something that will make them sick?

Now let’s go back to the markets. Just like the doll, the markets will keep going up “as long as” there is percieved value, however, if investors suddenly get worried, that value could evaporate like the value of the doll did. If a stock is trading at $200, but the percieved value becomes $20, the next buyer will be at $20 and just like that the value is evaporated (there are many companies that have alot of value and wouldn’t be expected to lose so much value, but the more extended the price the greater the potential drop). To make matters worst, HFT are basically computer programs. They are unemotional, however, when the people who are running them identify a shock to the market, they shut the machines off. These machines are currently creating most of the bids in the market. If they disappear, the bid disappears and falls like a rock. This is what happened during the flash crash of 2010.

So what about the central banks? They can just come in and print money if the market falls and help to push it back up again. There is some false logic in there because for every action there is a reaction. The money that the Fed prints does not disappear from the system. It will eventually have an effect on the US dollar. Let’s go back to the doll. Imagine the Fed was producing the dolls (they were not produced in China and the paint was not toxic). The thing is the Fed suddenly produced so many dolls that they were found in every shop on every corner. What would happen to percieved value? Well, the idea of scarcity would no longer be there. The dolls are no longer special and people are no longer going out of the way to buy them so the value would drop. It could keep dropping even below the cost price if people have no interest in buying.

 

This could happen to the US dollar. If the perception is that the US dollar is no longer that valuable, its percieved value would drop. What happens when it goes down? Everything becomes more expensive for everybody holding dollars. What happens if your dollars keep declining in value? You will want to get rid of them and change for something else. The US stock markets are priced in US dollars. So, if the central banks continue to print, the US dollar could lose its value to the point where people will sell their dollar denominated assets, such as stocks and bonds.

Is there anything else? Well actually yes. Over the past few years low interest rates have spurred a large number of companies to borrow in order to buyback stock. In addition, investors have been borrowing in order to purchase stock pushing up margin debt to extremely high levels. If the markets were to fall, there is a point which these individuals will get margin calls forcing them to sell their stock pushing prices lower. The same will be true for companies holding large amounts of debt that need to be paid back.

So, we have a few potential forces that could cause an incredible amount of damage to the stock markets. What will cause the start of it? That is what a few of us are trying to identify. What about everybody else? Well, it looks as though they are still pushing the price up of dolls made with toxic paint.

The Hutch Report

The Retirement Cage – 3 reasons to get out!

By | Health, Money, Psychology

In order to understand retirement and what it means to you, it is necessary to understand where it comes from and why we even have retirement.

Otto Von Bismarck was the Chancellor of Germany back in the early 1880s. During his tenure he encountered a problem.  Marxist unrest was spreading across Europe and some of his own countrymen started calling for socialist reforms. In order to avoid the potential for more radical reforms Bismarck concocted a social insurance program that was unique and had never been seen before,  wherein the national government would contribute to the pensions of nonworking older Germans.

Bismarck announced the idea in 1881, and along with the German Emperor William the First, the pair made their case to the German Parliament (Reichstag), that “those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.” Germany initially chose 70 as its retirement age, and didn’t lower it to 65 until long after Bismarck was dead. The choice for the age of eligibility was actually more of a clever cost-saving measure: it closely matched the average German life expectancy at the time.

In the US, during the Great Depression, elderly Americans rallied behind Francis Townsend, a physician who proposed a government-funded pension plan that would send $200 a month to all citizens over the age of 60 (enough for a comfortable middle class lifestyle) and require them to spend the entire check within 30 days of receiving it.

In 1934, thirty states had old-age pension laws. In about half of those, retirees aged 65 and above were eligible for aid. In the rest, the minimum age was 70. President Roosevelt thought Townsend’s proposal of 60 was too low (and that the whole plan was fiscally irresponsible) but felt that 70 was too extreme, so he pushed for the middle path. When the Social Security Act passed in 1935, it specified 65 as the age at which retirees could receive full benefits. So it was essentially a compromise.

Life expectancy in the 1930s was 58 for men and 62 for women, which suggested that most wouldn’t even live long enough to collect their first Social Security check. According to studies conducted by the World Health Organization current life expectancy levels in the US are 76.5 for men and 81.2 for women.

So now we know where the idea comes from we can look at some of the problems that have evolved.

The Money is Running Out

This is the new Economy and not everything is as it seems. For years, State and local governments have waved generous retirement benefits in front of workers. The workers accepted these offers without stopping to wonder if their state or city could keep its promises when the money came due. Although state governments have many powers, creating money from thin air is not one of them. This is only a power that is granted to the Federal Government. Now that the bills are coming due, the state’s’ inability to keep their word is becoming obvious. The fact is, many of these pension plans are now “underfunded.” This underfunding dilemma can be faced by any type of defined benefit plan, private or public, but it is most acute in governmental and other public plans where political pressures and less rigorous accounting standards have resulted in excessive commitments to employees and retirees, but inadequate contributions. Many states and municipalities across the country now face chronic pension crises.

Illinois is, at the moment, the worst offender and the poster child for what can go wrong. However the problem of public pension programs being underfunded is not confined to Illinois by any means. Other states are in almost as bad shape and thousands of cities and counties also have underfunded pension plans. Some estimates place the national shortfall of state and local public pension funds at about $1 trillion but that is an optimistic view.  A more pessimistic, or realistic, view, places the shortfall closer to $5 trillion. If that higher number is correct, which depends on assumptions about expected future rates of both funding and investment returns, the unfunded pension liability of state and local governments is equal to one quarter of the national debt. Under these more realistic/pessimistic assumptions, Illinois would be over $610 billion short on its pension funding, an amount equal to almost seven years of all state revenue.

To make matters worse, we are living much longer than pension systems were designed to support. The number of years of retirement income that had to be paid in 1960 was about five to eight years of payments, on average. Looking at life expectancy in 2017, we can see that pensioners are already living eight to 11 years longer – and in the case of Japan, the number is as high as 16 years longer. What this means is that pension systems are now having to pay benefits for two to three times longer than they were designed for.

There are three main sources of income during retirement: government-sponsored pensions; work or occupational pension plans; and personal savings. However, because we are living so much longer these days, the gap between savings and what will be needed during retirement is widening, even in countries that have the best-developed pension systems. If your savings account balance is looking sad, you’re not alone. According to a 2016 GOBankingRates survey, 80% of the baby boomer generation, those coming up on retirement, have less than $10,000. 69% of Americans have less than $1,000 in their savings accounts. What’s more, 34% have no savings at all.

Psychological Effect of Retirement

So now we have determined that relying on a fat pension and savings for your retirement is not the best option. To add to the pain, the actual concept of retirement has in fact been the cause of a variety of psychological effects among retirees. According to a new report released by the Institute of Economic Affairs (IEA), following an initial boost in health, retirement increases your risk of clinical depression by 40 percent while raising your chances of being diagnosed with a physical condition by 60 percent. It also: Reduces your likelihood of being in self-reported excellent or very good health by 40 percent and raises your risk of taking medication for a diagnosed physical condition by 60 percent. The study’s author, who called retirement’s impacts on health “drastic,” suggested a later retirement age may actually be preferable, noting: “New research presented in this paper indicates that being retired decreases physical, mental and self-assessed health. The adverse effects increase as the number of years spent in retirement increases.”

In conclusion, retirement is not actually the “Golden Years” of enjoying life that the marketing of pension funds and plans have always made it out to be. Having a purpose in life is essential. Work, to many of the population is part of that purpose. Take that away and you are actually taking a piece of your life away.

The World Changes

So if you hold the mindset that you can start to enjoy life or travel when you retire and see the world, you may find that you have waited too long. Your physical health may not permit you to do all those things that you had planned throughout your life. You may not have the same motivation or energy level to start ticking off all those things on your bucket list.

The world changes and is forever changing. The twenty-first century began with the invasion of Iraq in 2003 and the global financial crisis of 2008 – with regional, economic, and political instability spreading to many parts of the world. From a financial meltdown in Iceland to political crisis in Brazil, from the destruction of Yemen to the dysfunctional birth of South Sudan, from the rise of nationalism and of religious fundamentalism, to the weakness of international organizations, the last few years have been ripe with new crises. These crises cause the destruction of what were once peaceful nations and force the migration of people to other lands which in turn cause additional economic pressures.

You may have dreamed of seeing Egypt but were waiting for retirement to experience the wonder of the Pyramids, one of the 7 wonders of the ancient world. Well, since the Arab Spring, Egypt may no longer hold the same charm that it did 30 years ago when you talked about your retirement dreams. This is one example of many. Hong Kong has been handed over to the Chinese, China has undergone radical changes, Venezuela seems to be on the verge of a failed state and Syria has been pretty much bombed to smithereens.

Don’t expect to have a perfect situation waiting for you in the future where you are suddenly going to be able to pickup and takeoff to experience all the things you always dreamed of. We have provided three strong examples which clarify why we believe this. This makes for great marketing copy but it is far from the realistic view that we are seeing. Don’t plan for retirement, plan for life and life doesn’t happen after 65, it is happening right now. Live your dreams now, not later.

So, with that, we leave you with this famous quote that has been falsly attributed to John Lennon around 1980:  (In fact, the general expression can be traced back more than two decades before this time. The first known appearance was in an issue of Reader’s Digest magazine dated January 1957. The statement was printed together with nine other unrelated sayings in a section called “Quotable Quotes.”)

“Life is what happens to us while we are making other plans”— Reader’s Digest

The trouble is most of us don’t realize this except in retrospect and then life has already happened. Don’t make the same mistake.

The Hutch Report

Startups and Raising money: What is a company with no revenues worth?

By | Business, Money, Startups

Raising seed capital and figuring out company valuation is always a challenging and critical milestone in the early life of a start-up. Startups are awesome (if you are in with the right team)

You may have noticed from some of our previous posts on The Hutch Report, that we like start-ups. We have had experience in large, multi-national blue-chip companies as well as failed and even more fun, successful start-ups.

Raising money: What is a company with no revenues worth?

I am currently embarking on a new start-up in the fintech space and am confronted with having to answer this question. We are currently in the stage of seeking seed funding as well as first pilot customers and trying to do both things at the same time.

There are several challenges you can imagine for putting a value on the company. The major one being that with no revenues and no similar companies on the market, how do you value a company at this stage? Some call it art. Others try to make it a science, but if you are honest with yourself and with others you cannot claim it is a science. You can always try to justify the business value through the business plan, the potential addressable market size, and with sales + opex forecasts. Of course, you do need to calculate and prepare all of that. At the end of the day though, with just an idea, a few slide decks, some excel, and no customers and no revenues you really can’t justify anything other than whether or not your plan looks reasonable and potentially feasible. So, what does one do?

Thankfully, there are some commonly accepted principles for this stage of the game. One of the common principles is that the total of all actual seed money raised should represent 20% to 25% of the value of a company at post seed valuation. (I have actually seen amounts as low as 15% and as high as 30%).

The way we are approaching our seed raising round at the moment is as follows. We have calculated it will cost about US$ 1mm over a twelve-month period to get to our first commercial launch. We have a plan that details and maps out the specific costs. This includes development, admin fees, legal fees, as well as a shoestring budget for sales and business development. The business plan does show how quickly we can recoup this US$ 1mm in costs once we get to commercial launch and revenues. Therefore, we can clearly present where the money goes, how it will be used, the timing of when it is needed, and have reasonable calculation of the results the investment may yield. We are targeting a US$ 4mm post-money valuation with a US$ 1mm seed investment in exchange for giving up 25% of the company post-money.

Pre-money and Post-money: Valuation and Dilution

An important concept is the valuation of the company pre-money and post-money. After an investment round is completed the value of the company goes up by the size of the investment round, hence it is called the post-money valuation. So, in the example above, our company will be worth US$ 4mm once we complete our seed round. In our case, at the moment we think we may not need any additional investment after that initial round. However, let’s say that we find out that we are wrong and do need more money – perhaps to invest more in sales, marketing or additional product development. Let’s say we need US$ 2mm more to do that. Assuming we succeed in the subsequent funding round, and assuming no revenues yet, the company would then already be valued at US$ 6mm post-money valuation after this second round is completed. Dilution would occur and the initial seed investor share percent would go from 25% to 16.67%. The founder share percent would also be reduced and diluted. At the end of the day, even if I started out with 75% of one million and end up with 2% of US$ 10bn, I would be very happy. So, while dilution is, well dilution, a smaller percentage of something big can be better than a large percentage of something small.

Option Pools and Advisors

In calculating the share capital of your start-up, it is always a good idea to leave room in for option pools as well as for advisors. In order to attract top talent, you will want to be able to give them shares in the company. As many start-ups operate on a shoe string budget and are not able to pay massive salaries or benefits, offering key talent an upside in your company can go a long way to helping unleash their passion to help make the company and whole team successful. In addition to option pools for employees you will also want to keep some reserved for key folks, well connected individuals, industry thought leaders, that you may want to bring on as your board of advisors (BOA) or non-executive directors (NEDs). Typical amounts for a board of advisor role would be 0.5% to 1%. As with the initial founders and seed investors, these amounts also get diluted with each additional funding round.

If you just google “equity model calculator” you will find a lot of results on the web along with sites that generate fancy charts. However, save yourself a ton of time. Most of these sites are not so clear and kind of clunky to customize the model if you want. We have done the work and found one that answered all of our questions. In addition, it even provided a template we could customize to our specific situation. This link is shared below. Attention – just one slight thing was missing, the model does not contain entries for BOA or NED amounts, or at least it did not when we used it, however, you can easily add those in yourself just as we did.

Tool for calculating your equity cap table and post money dilution effects:

http://thedrawingboard.me/2013/11/10/model-cap-table/

Link to the Model Cap Table: http://bit.ly/1ayKk8p

If you find this helpful please share or share with anyone you think may find it useful. Thank you for reading!

The Hutch Report

Is India Planning to Regulate Bitcoin?

By | Cryptocurrency, Money, Technology

On June 20, CNBC India announced that the Indian government committee has ruled in favour of regulating Bitcoin and is currently establishing a task force to create various regulatory frameworks with the aim of fully legalising Bitcoin in the short-term.

Back in February of this year Japan recognised Bitcoin as a legal payment method. In April, the Indian government said it would set up an interdisciplinary committee to take a close look at the circulation of crypto currencies in the country, which it did.

Chris Burniske of ARK Invest (crypto expert) , noted that the trading volumes in India had been on the rise prior to the announcement. Burniske previously revealed that the Indian Bitcoin exchange market is responsible for processing around 11 percent of Bitcoin-to-USD trades.

The three largest Indian Bitcoin exchanges include Zebpay, Coinsecure and Unocoin have been operating with self-regulated trading platforms with strict Know Your Customer (KYC) and anti-money laundering systems in place in spite the lack of regulations in the digital currency industry and market.

On Zebpay’s website, under legal (https://www.zebpay.com/legal)  they present this:

Bitcoin is legal as per expert opinion

Nishith Desai Associates, India’s leading international law firm have published a white paper which concludes that bitcoin is legal in India. (where you can find a link to the white paper)

However, if you download the white paper you will see that it has been written in 2015.

They also produce information provided by the CIS, India’s leading Internet organization. The CIS helped Internet remain neutral in India in the 2015 net neutrality fight. They published a research post on their website which also states that bitcoin is not illegal under any existing laws.

However, once again this paper seems to be outdated.

Just below, you can see this cautionary note: “RBI (Reserve Bank of India) cautions users of virtual currencies,” and yet according to Cointelegraph, “Leading Bitcoin exchange Zebpay has revealed that the Indian government committee has ruled in favour of regulating Bitcoin.”

According to Zebpay’s blog post of March 23, they wrote, “Recently, there have been a few media reports that bitcoin has been declared illegal by the Indian government. No, that is not true. Nothing has changed regarding bitcoin’s legal status in India.”

So, is this a repeat situation?

If the Indian Government had truely ruled in favour of regulating Bitcoin I would have expected to see something on either Zebpay, Coinsecure or Unocoin’s website before anybody else. On Unocoin’s press page, the last entry is from December 1, 2016.

My next stop was the Reserve Bank of India website. There was absolutely nothing which I also found strange.

So, did CNBC India jump the gun on this story? Did this information really come from Zebpay or is it “fake news?” Or did they really rule in favour and these other actors are just waiting to get a definitive answer?

If this turns out to be true and India, the world’s second largest populated country,  does take steps to regulate Bitcoin and recognize it as a legal payment method, it will help propel all these cryptocurrencies much higher.  Stay tuned!