Lexicon Financial Group Weekly Update — APRIL 24, 2024
“I always tell people, please don’t put more than 1-2 per cent of your net worth in crypto. Please don’t invest more than you can afford to lose.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
While we are not investing client assets into cryptocurrencies like Bitcoin, we are paying attention. On one hand, many continue to steer clear of what has clearly been a highly-volatile investment category. Others continue to tout the end of money as we know it and the rise of the digital wallet.
Last week marked a special moment for Bitcoin – its quadrennial (every four years) halving. Bitcoin is “mined” through a vast array of computers completing complex computational tasks. It’s called Bitcoin mining and this is how new Bitcoins are created. Unlike the miners of the old who went with pick and shovel to dig gold, this process is entirely driven by computers.
The halving reduces the amount of Bitcoin available to be mined. In one fell swoop, it became twice as hard to create new Bitcoins through mining. Currently, the jury is still out as to whether this halving will further boost the price or not. Interestingly, this is a feature and not a bug of Bitcoin itself. If the supply of coins is infinite, an infinite coin would be worthless. It’s scarcity that matters when creating value: simple supply and demand economics.
With all investments, you should always know and understand what you are buying.
So, what is cryptocurrency?
A cryptocurrency is a form of digital asset based on a decentralized network (fancy words for a network of computers that exist in multiple locations) that is distributed across a large number of computers. Most cryptocurrencies also rely on a technology known as the “blockchain,” which is a ledger or record-keeping system stored on yet another set of computers. Because this information exists in multiple places at the same time, it allows the structure of a cryptocurrency to exist outside the control of governments and central authorities.
Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems and enable secure online payments without the use of third-party intermediaries. You can transmit cryptocurrency from your wallet to another user’s wallet anywhere in the world. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions. But let’s leave these to the combinatorial mathematicians.
But it’s the blockchain that brings it all together. It’s just a set of connected bits (blocks) of information on an online ledger. Each block contains a set of transactions. Because transactions are verified and confirmed on a decentralized network, it is almost impossible to forge transaction histories.
There are, however, a plethora of different digital currencies. Some use blockchain to store information, securely. It’s fair to say that not all cryptocurrencies are created equal, so it pays to know what you’re looking at when deciding if you want to buy.
Here are some of the types you'll find with names of some of the tokens in that category:
Utility: Ethereum is an example of a utility token which serves a specific function on its respective blockchain.
Transactional: Tokens designed to be used as a payment method. Bitcoin is the most well-known of these.
Governance: These tokens represent voting or other rights on a blockchain, such as Uniswap.
Platform: These tokens support applications built to use a blockchain, such as Solana.
Security tokens: Tokens representing ownership of an asset, such as a stock that has been tokenized (value transferred to the blockchain).
If you happen to find a cryptocurrency that doesn't fall into any of these categories, you've found a new category and that needs to be investigated to be sure it's legitimate.
Some, but not all, cryptocurrencies have generated a reputation as unstable investments due to scams, hacks, bugs, and volatility. Although the underlying cryptography and blockchain are generally secure, the technical complexity of using and storing crypto assets can be a significant hazard to new users. There are also market risks that any cryptocurrency investor should be aware of. Here are some:
User risk: Unlike traditional finance, you cannot reverse or cancel a cryptocurrency transaction after it has already been sent. By some estimates, about one-fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.
Regulatory risks: The regulatory status of some cryptocurrencies is still unclear, with many governments seeking to regulate them as securities, currencies, or both. Any sudden regulatory crackdown could make it difficult to sell cryptocurrencies or cause a market-wide price drop.
Counterparty risks: Many investors and merchants rely on exchanges or other custodians to store their cryptocurrency. Theft or loss by one of these third parties could result in losing one's entire investment.
Management risks: Thanks to the lack of coherent regulations, there are few protections against deceptive or unethical management practices. Consequently, many investors have lost large sums to management teams that failed to deliver a product.
Programming risks: Many investment and lending platforms use automated smart contracts to control the movement of user deposits. An investor using one of these platforms takes on the risk that a bug or exploit in these programs could cause them to lose their investment.
Market Manipulation: Market manipulation is still a significant problem in cryptocurrency, with influential people, organizations, and exchanges acting unethically.
Despite all of these, cryptocurrencies have seen a significant price leap, with the total market capitalization rising to about $1.2 trillion. (1)
If you have questions about cryptocurrency or any other investment (exchange traded funds, for example), please contact us and we will set up a meeting or call.
Looking Back
After a strong start in Q1 2024, markets have, as of last week, pulled back 2.5 per cent since the beginning of Q2. Unease around geopolitical tensions in the Middle East, higher inflation, weaker corporate earnings, and other issues have led to a market decline, pushing the Chicago Board Option Exchange Volatility Index (VIX) to its highest level in six months. (2)
Source: Dogs of the Dow
The VIX, as you may know, is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). It generates a 30-day forward projection of market volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and, in particular, the degree of fear among market participants. (3)
This move in the VIX was mirrored by the CNN Fear & Greed Index.
Source: CNN Business
Although market volatility is stressful, investors should aim to maintain perspective on the critical issues and avoid overreacting to headlines. Volatility isn’t always bad. If markets were perfectly flat, there wouldn’t be any opportunity for investment growth.
That said, Canada’s main stock index, the S&P/TSX composite index (TSX), despite energy and interest rate sensitive shares notching gains, was down for the week but ended up 0.5 per cent on Friday. Money markets see a roughly 50 per cent chance that the Bank of Canada (BoC) will begin cutting interest rates in June this year. (4)
In the United States (U.S.), markets continued to retreat on geopolitical and interest rate worries and recorded their third consecutive week of broad losses. A first-quarter revenue miss from advanced chipmaker supplier ASML Holdings weighed on the technology sector and subdued general optimism toward companies with artificial intelligence (AI) related earnings. Small-cap stocks also continued to struggle.
On top of all this, some strong economic data increased worries that the Federal Reserve (Fed) would push back any interest rate cuts to the fall and possibly to 2025. Last week, the Commerce Department reported that retail sales rose 0.7 per cent in March, well above consensus expectations of around 0.3 per cent, while February’s gain was revised upward to 0.9 per cent. The strength of retail sales was broad-based and included healthy gains in discretionary categories, such as restaurants and bars and online retailers. The retail sales data helped push the yield on the benchmark 10-year U.S. Treasury note to its highest level since early November last year.
Interestingly, the Dow Jones Industrial Average ended the week in positive territory. This could be the early signs of a “flight to quality,” as investors move on from the Magnificent Seven tech stocks and invest in larger, more stable, secure “blue-chip” stocks. It’s something to keep an eye on, for sure.
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | -3.0% | 4.1% |
| Nasdaq Composite | -5.5% | 1.8% |
| Dow Jones Industrial Average | 0.1% | 0.8% |
| S&P/TSX Composite Index | -0.4% | 4.1% |
Source: Associated Press and FactSet 04/19/2024
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Video: Canadian economic data aligns with potential June rate cut: CIO – BNN Bloomberg
Everything you need to know about market volatility - Fidelity
The bubble has burst: On the road to a lost Chinese economic decade - The Hill
The pan-European STOXX Europe 600 Index ended 1.18 per cent lower as tensions rose in the Middle East. Major stock indexes were mixed: Germany’s DAX fell 1.08 per cent, Italy’s FTSE MIB gained 0.47 per cent, and France’s CAC 40 Index was little changed. The UK’s FTSE 100 Index declined 1.25 per cent. European government bond yields broadly climbed.
A significant number of European Central Bank (ECB) policymakers at the Spring IMF meeting last week reiterated that June was the likely target date for lowering borrowing costs, barring any unexpected economic shocks. ECB President Christine Lagarde stated that policy should still depend on incoming economic data, given the high levels of uncertainty. She added that the ECB would monitor oil prices “very closely” amid worries about conflict in the Middle East.
Japan’s stock markets took a beating last week, thanks to escalating tensions in the Middle East. The Nikkei 225 Index was down 6.2 per cent, and the broader TOPIX Index lost 4.8 per cent. An additional factor weighing on the markets was some concern about waning AI-related demand. In fixed income, the yield on the 10-year Japanese government bond closed the week at around 0.84 per cent, broadly unchanged from the prior week. Bank of Japan Governor Kazuo Ueda stated again that if weakness in the yen exerts significant upward pressure on inflation, a rate hike may be necessary.
Major markets in China rose due to the economy expanding more than expected in the first quarter of 2024. The Shanghai Composite Index gained 1.52 per cent, while the blue chip CSI 300 added 1.89 per cent. In Hong Kong, the benchmark Hang Seng Index gave up 2.89 per cent, as escalating geopolitical tensions in the Middle East hurt investor sentiment.
China’s new home prices fell 0.3 per cent in March, matching February’s 0.3 per cent drop and extending losses for the ninth consecutive month. This despite the fact that China’s government has ramped up efforts to revive the troubled sector by relaxing homebuying restrictions and directing state-owned banks to step up lending to indebted property developers. This data shows that China's housing slump has not yet bottomed out and remains a significant drag on the economy. (5)
Lastly, market corrections, especially after a strong run, is not unusual. On average, market corrections of 10 per cent or more have occurred every 1.2 years since 1980. (6)
Although no one can predict these corrections, they represent buying opportunities for long-term investors. These opportunities may be a way to make hay even when the sun is not shining.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Cryptocurrency Explained With Pros and Cons for Investment, The Investopedia Team, Investopedia, November 3, 2023
Portfolio Manager Insights | How Investors Can Navigate Market Pullbacks, Geopolitical Risk, and More – 4.17.24, Kingsview Partners, April 17, 2024
CBOE Volatility Index (VIX): What Does It Measure in Investing?, Justin Kuepper, Investopedia, December 12, 2023
The close: Nasdaq, S&P 500 tumble as Netflix, chip stocks drag; TSX gains, The Globe and Mail, April 19, 2024
Global Markets Weekly Update, T. Rowe Price, April 19, 2024
Understanding Stock Market Corrections and Crashes (2023), Mark Fonville, Covenant Wealth Advisors, April 15, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
Bitcoin's latest 'halving' has arrived. Here's what you need to know
What Is Bitcoin Halving? Definition, How It Works, Why It Matters
Making sense of bitcoin, cryptocurrency and blockchain