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About Profitable Investing Tips

Profitable Investing Tips has been a member since April 20th 2008, and has created 235 posts from scratch.

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Cryptocurrency Investment Regulation

Those who purchased cryptocurrencies like bitcoin when they were a few dollars each have become rich. And, those who purchased bitcoin at the end of the 2019 pump and dump lost their shirts as the cryptocurrency fell from nearly $2000 each to the $600 range. Now that the pandemic has raised havoc in the economies of the world, bitcoin and other cryptocurrencies are soaring again. Cryptocurrencies are a concern to governments around the world because one can buy and sell, transfer assets, and never been seen. Terrorists and the drug trade are believed to benefit from the hidden nature of cryptocurrency trading. While many would like Bitcoin and other cryptocurrencies to move into the mainstream, regulation will be necessary to protect investors and reduce the attractiveness of cryptocurrencies to those who want to hide money.

Cryptocurrency Investment Regulation

A major issue for cryptocurrency investment regulation is how to trade bitcoin and others. Are they securities, commodities, or currencies? The Library of Congress Law site provides insight into how cryptocurrencies are treated, avoided, regulated, or ignored around the world.

One of the most common actions identified across the surveyed jurisdictions is government-issued notices about the pitfalls of investing in the cryptocurrency markets.  Such warnings, mostly issued by central banks, are largely designed to educate the citizenry about the difference between actual currencies, which are issued and guaranteed by the state, and cryptocurrencies, which are not.  Most government warnings note the added risk resulting from the high volatility associated with cryptocurrencies and the fact that many of the organizations that facilitate such transactions are unregulated.  Most also note that citizens who invest in cryptocurrencies do so at their own personal risk and that no legal recourse is available to them in the event of loss.

Before cryptocurrencies are accepted into the financial mainstream, they need to be regulated. The report summarizes how this has been done in 130 nations across the world.

Cryptocurrency Investment Regulation

Cryptocurrencies as Securities, Commodities, or Currency

Who regulates a cryptocurrency and how they do so depends on what you consider this type of asset to be. Lexology.com looks at this issue. In the EU central banks have noted that cryptocurrencies do not fit the legal definition of a currency as they are digital representations of value and not issued by central banks or other like institutions. However, the European Court of Justice said that for tax purposes they should be treated as currencies.

Because securities are tangible proof of ownership of debt, the Chairman of the US SEC said that cryptocurrencies do not qualify as they don’t represent ownership.

In regard to cryptocurrencies as commodities, regulators have noted that cryptocurrencies do not represent anything of underlying value such as with coffee, gold, or natural gas. Nevertheless, the US Commodity Futures Trading Commission said in 2018 that in certain instances cryptocurrencies are commodities. In fact, you can trade Bitcoin futures on the Chicago Mercantile Exchange.

Because this issue is still up in the air, two nations have moved to qualify cryptocurrencies as Digital Ledger Assets (DLTs). They have both enacted laws regulating cryptocurrencies within their jurisdictions using this definition.

Cryptocurrency Sales and Taxation

Although the USA does not yet have a strict definition of what a cryptocurrency is for regulatory purposes, the IRS has made it clear that profits from selling bitcoin and other cryptocurrencies are taxable either as short term or long term profits, depending on how long you have held them before selling.

Regulation and the Future of Cryptocurrencies

The general consensus of experts is that regulation will have a dampening effect on the wide swings in monetary value of cryptocurrencies. It will probably have a beneficial effect on the safety of holding cryptocurrencies as exchanges will likely need to open their books to regulators and have better guarantees that assets to not disappear overnight with a couple of computer keystrokes!

US Isolationism and Your Investments

The South China Morning Post reported the signing of the Regional Comprehensive Economic Partnership that includes China and most of its Asian neighbors. This deal includes Japan, Australia, New Zealand, and South Korea but not the USA. The new trade deal will lower tariffs and aims to increase regional trade with less red tape. Post-pandemic growth is expected to benefit in the region. Not only is the USA not part of this deal but it is also not part of the Transpacific Partnership which the Obama administration helped develop and Trump pulled out of. Here are some thoughts about US isolationism and your investments.

Protectionism and Your Investments

Protectionism, according to Investopedia, is when a government restricts international trade. The goal of protectionism is typically to stimulate economic activity in the county. However, it can also be instituted for reasons of safety, quality, and geopolitical concerns. As with the trade war started by Donald Trump, tariffs and import quotas are common tools. The infamous Smoot-Hawley Tariff Act in the 1930s was meant to protect US industry but initiated a trade war that was partly responsible for the depth and length of the Great Depression. Protectionism is often driven by a desire for isolationism. A country and its people feel threatened by foreign competition. The Trump trade war played on a belief that foreigners were taking advantage of the USA and that the USA had to close its borders to trade or hike up tariffs to protect itself. The result so far appears to be an exclusion of the USA from two important markets at a time when China and other Asian markets are expanding. How should you invest when US companies will find it more difficult to compete in a third of the economies of the world?

Investing from an Isolated Country

If you want to invest where there is more economic activity, you may need to invest abroad instead of in the USA. This means investing in foreign stocks. But, if laws like the Kennedy Act take hold, investing in China will be more and more difficult. The targeted decoupling from China will become a greater and greater issue going forward. However, you can invest in companies that do business in other nations in the Asian Pacific. These companies will likely benefit from trade deals from which the USA is currently excluded. ETF Trends writes about investments from abroad. As they note, the USA is about 25% of the world market and that percentage may well decline as other economies advance and the US stagnates in isolationism. Luckily, you do not need to speak a foreign language or deal with a stock broker in a foreign country in order to invest in foreign markets. You can choose investment funds that track offshore investments and you can purchase ADRs (American Depositary Receipts) of foreign stocks listed in US stock exchanges.

A good resource for checking out ADRs is the website TopForeignStocks.com. The ADR listings are grouped according to economic region and then by country. US News has a nice listing of ETFs with an international focus, low costs, diversified, and meant for safe long term investing.

Covid-19 Pandemic and Surge in ESG Investing

Many expected ESG investing to take a dive due to the economic stresses of the Covid-19 pandemic but there has been a surge of ESG investing instead. It appears that long term investors realized that the best-run companies were the most likely to endure and prosper during these difficult times. And, the stresses of the pandemic have also reinforced concerns about how we deal with our planet and each other.

Covid-19 Pandemic and Surge in ESG Investing

Financial News published an insightful piece in regard to the Covid-19 pandemic and surge in ESG investing. As they note, the strongest focus has been on the “S” in ESG in that human capital management and labor standards. Well-run companies with a focus on sustainability are the most likely to survive and prosper.

The trend of Environmental, Social and Governance investing, or ESG, has been gaining momentum for years as climate change and other social ills threaten to alter the capitalist landscape. Then the virus struck. Many assumed the ESG focus would fade. But early on in the crisis, major shareholders urged company bosses to focus on employee well-being and on ensuring that suppliers were paid during global lockdowns, even if this meant cutting or suspending dividend payments.

This attention to how a company acts going forward is likely to continue to focus on governance and sustainability as well as environmental concerns according to JPMorgan Asset Management. They state, according to Financial News, that nearly three-fourths of their investors believed that the Covid-19 crisis will lead to more concerns about issues like biodiversity losses and climate change. It would seem that the pandemic has made us realize that the natural world has a huge say in how human life and investments play out!

The number of investment funds focusing on ESG investing has multiplied and these funds are making it clear to companies that they will put their investments with those who emphasize an ESG focus more than a focus on short term profits.

Covid-19 Pandemic and Surge in ESG Investing
Courtesy Lixoretf

Demand for ESG Investments Increases Due to the Covid-19 Pandemic

Morningstar also notes that investors are demanding ESG investments during the pandemic and for afterward. Investment trusts and ETFs are maintaining an active focus on the companies they are invested in and active stewardship as well. Thus they meet with corporate boards to review ESG issues. The first issues right now have to do with employee health, safety, and retention. But, supply chain issues are of great concern both for company viability but also concerns about forced labor, employee mistreatment, and dealings with military and spy services as with China. While the US government is moving toward decoupling from China for national security reasons, ESG investors are concerned about company viability and the effects of the work force.

With the increasing focus on the safety of our natural world, ESG investing is looking to the long term with investments in socially and environmentally responsible projects that will help us avoid Covid-19-like disasters in the future.

Decoupling of Investment in China

As the Covid-19 pandemic began, the USA had to go begging China to send protective masks made in China (by 3M). American had become dependent on a global supply chain to the extent that it had become a risk to national security. This situation had been decades in the making and the USA and other nations are taking actions. Decoupling of investment in China is a major part of this movement.

Decoupling of Investment in China

Although the decoupling of investment in China hit the general news as the pandemic was playing out, it has been on the minds of many for quite some time. In January of 2020 The Harvard Business Review wrote about how the USA and China will decouple.

While Covid-19 has dominated news for much of the year – and understandably so, as people and businesses fight for their survival – a larger, longer-lasting problem has been unfolding in the background, which many businesses will soon need to contend with: As de-globalization accelerates, two hostile economic blocs are emerging, one centered around China and the other around the United States.

Arguably, we’ve been headed towards this moment for a long while. De-globalization has been under way for more than a decade: At best, international trade was stagnating before the pandemic hit, and foreign direct investment had fallen by 70 percent in 2018 from its peak in 2007. Never easy, Sino-U.S. relations have taken a more confrontational turn under Xi Jinping. By 2018 we were already witnessing the opening skirmishes of a new Cold War.

We wrote about the Kennedy Act and investing in China a few months ago. In that article we noted how China has been using US investment capital to build up its high tech sector and how that sector often works hand in hand with Chinese intelligence operations and its military. The USA and other nations have been helping fund the rise of a nation bent on dominating Asia and then the world. We cannot stop them from having such ambitions but the USA, Europe, and others do not have to fund those efforts.

How Will Decoupling from China Affect Your Investments?

In the Harvard Business Review article they suggest several measures for international companies to take.

Reduce Business Presence in Hong Kong
Relocate Supply Chains to Politically Safer Countries
Reassess relationships with Chinese businesses and universities
Consider the geopolitical risks and reposition accordingly

As a US investor, you may be barred from certain investments in China and the number of prohibited investments may increase over time. Your decoupling of investment in China should be led by the degree of involvement of that investment with Chinese military or intelligence operations.

Direct US Actions to Decouple from China

The New York Times reports that investment in companies with military ties has now been barred by presidential action in the waning days of the Trump administration. Specifically, this means investments in Huawei, China Mobile and China Telecom. The list includes 31 companies including China Mobile Communications Group, China Telecommunications Corporation, Huawei, Sinochem Group, Hangzhou Hikvision Digital Technology, China Railway Construction Corporation, Inspur Group and Aviation Industry Corporation of China.

The order takes effect on January 11, 2021 and if you have investments in any of these companies or funds that invest in them, you have until November 11, 2021 to divest yourself of those assets. It is of note that China Telecom fell $4 a share from $36 to $32 on the news. However, the stock is now selling for what it has been worth for most of the year during the Covid-19 pandemic and resulting economic slump. This was a long time coming and is not likely to be reversed by the Biden administration. As such, investors need to get out of the specific investments on the list and consider what else might be pulled into the decoupling of the USA and China as a new cold war begins.

Renewable Energy Investments

The election of Joe Biden bodes well for renewable energy investments as the President-Elect calls climate change the greatest threat facing the human race. How can investors position themselves to take advantage of the coming emphasis on green energy? Is a focus on ESG investing sufficient or should you drill down and find specific investment opportunities? Here are a few thoughts on renewable energy investment in the Joe Biden presidency.

Alternative Energy Investments

Investopedia published a useful article about alternative energy stocks for late 2020.

The alternative energy sector is comprised of companies that engage in the generation, distribution, and sale of renewable and clean energy, as well as related products and services. Examples of alternative energy sources include solar, wind, hydroelectric, and geothermal.

They cite a few examples of promising renewable energy investments.

The growing list of names in the sector includes companies like Israel-based SolarEdge Technologies Inc. (SEDG), Brazil-based Companhia Energetica de Minas Gerais CEMIG (CIG), and First Solar Inc. (FSLR).

And, they note that you can buy shares of ETFs that track renewable energy investments as well.

Alternative energy stocks, as represented by the iShares Global Clean Energy ETF (ICLN), have dramatically outperformed the broader market, posting a total return of 47.4% compared to the Russell 1000’s total return of 12.6% over the past 12 months.

Even before Biden won the 2020 presidential election, this sector has done well. We expect that with a green energy-friendly president in the White House that the sector will do even better in the coming years.

Renewable Energy Investment Opportunities

US News provides us with their list of the seven best renewable energy stocks and ETFs. Their list includes the following:

Invesco Solar ETF
iShares Global Clean Energy ETF
NextEra Energy (NEE)
Vestas Wind Systems (VWDRY)
Brookfield Renewable Partners (BEP)
Iberdrola (IBDRY)
ALPS Clean Energy ETF (ACES)

This list of investment opportunities in the renewable energy sector gives investors the opportunity to invest in green energy and make money. The sector did well this last year during the Trump administration but is likely to thrive under Biden.

Mixing and Matching Energy Investments

As the climate warms up, the world will transition to renewable energy, reduced carbon emissions, and energy conservation. However, oil and natural gas are not going away in a hurry. We wrote recently about Exxon as an investment. The smartest energy investors may well be the ones who hedge their bets by maintaining positions in the traditional oil and natural gas sector while adding targeted renewable energy investments for the future.

The geopolitical benefit of US energy independence is huge. As such, even a green Biden administration is unlikely to undercut the ability of the nation to extract petroleum products and avoid going back to dependence on oil from the Middle East. And, as the Covid-19 pandemic is brought under control, the world economy will improve. Energy requirements will go up. And, all well-managed energy companies are likely to see the benefit, not just renewable energy investments.

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