Satoshi Nakomoto started Bitcoin with an email to some of his peers. From there, Bitcoin got big. These days, most new crypto coins start out with Initial Coin Offerings (ICOs). This...READ MORE
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Back in 2014, I read a book called The Ivy Portfolio, by Meb Faber, on how to invest like the top university endowment funds and avoid bear markets. In this article, we go over some key points of t...READ MORE
In a recent article, I shared my thoughts on Cryptocurrencies as potential long-term investments. In writing that article, I became very inte...READ MORE
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“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” - Albert Einstein
This post is taken from chapter two of Stop Saving Start ...READ MORE
I'm a firm believer in the KISS ("Keep It Simple Stupid") acronym, especially when it comes to long-term investing. Below is the over-summarised version of the...READ MORE
By Jonathan Hobbs, CFAJuly 2018
There are many ways to trade or invest in bitcoin. In this post, I’ll explain how bitcoin futures contracts work.
What are futures contracts?
A futures contract is essentially a forward contract that can be bought or sold on an exchange.
A forward contract is an agreement to buy or sell X amount of an asset at price X in the future. This allows people to “lock in” a buy or sell price of an asset in the future to protect them from the risk of an unfavourable price change. The example in the box below explains this concept in more detail:
Forward Contracts: the wheat farmer and the baker
A wheat farmer sells wheat to a baker at the end of the wheat harvesting season. The baker uses the wheat to make bread. The price of wheat at the end of the harvest season affects the wheat farmer and the baker differently:
- If wheat is cheap in the future, the farmer loses out when he sells it to the baker. The baker wins because he can buy the wheat cheaply from the farmer.
- If wheat is expensive in the future, the farmer makes more money when he sells it to the baker. The baker loses out because he has to buy wheat at the higher price.
In this case, wheat is the underlying commodity. Its price fluctuates up and down all the time, yet the bakers’ bread stays the same price all year. This is made possible through forward contracts.
Say the baker wants to buy 10 bushels of wheat from the farmer in two months time. He could enter into a forward contract with the farmer to buy those 10 bushels of wheat at a price they both think is fair. Now the farmer and the baker have “locked in” the price of their future business deal.
So that’s the basic idea behind a forward contract—the baker and the farmer are hedging price risk.
By Jonathan Hobbs, CFAMay 2018
An unfortunate truth about investing is that we can’t earn decent investment returns without taking on risk. On the one end of the risk spectrum, we could leave our money in a bank account earning less than 1% interest a year. Not much risk here, but no returns either
At the more extreme end of the risk scale is spinning a roulette wheel at the local casino. The risks are huge—meaning the chance of losing our initial ‘investment’ is very high—but so are the potential rewards if luck happens to go our way.
Investor risk profiles
Investors have different risk profiles depending on things like:
- How much spare change they can afford to lose.
- How close they are to retirement.
- Whether they have a steady job or business that generates enough cash each month to pay their living expenses.
Those with more years of investing left ahead of them may wish to take on more investment risk because they have more time to recover if things go wrong. These investors might allocate more of their portfolios to riskier investments such as cryptocurrencies, startup companies and growth stocks.
Those who are lucky enough to have already retired, however, may want to live on a steady income stream from the investments they have already accumulated. Their biggest risk is losing their retirement savings—meaning they are typically more inclined to play it safe. These types of investors often allocate more of their portfolios to interest paying bonds and stable dividend-paying stocks.
By Jonathan Hobbs, CFAApril 2018
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