Bitcoin Has Dropped By Half Since August. Why Are Investors Digging in Their Heels?

Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am Paul Winkler.

Mr. Evan Barnard is here with me as well, which, it was a pleasant surprise to see him walk in there. I was like, “I didn’t know you were coming.” If I’d have known you were coming, I would have baked the cake.

Evan Barnard: Party crasher, wedding crasher.

PW: I love it.

EB: Show crasher.

PW: No, that’s awesome, man. It’s awesome.

So yeah, it was a week and a half to remember. Oh my goodness. I don’t know. Ten days for us without power.

EB: Yes. For you. I was fine.

PW: For me, yeah. Well, I got it back literally on Wednesday, which was just in time for me to go on NewsChannel 5+. I was on there doing the OpenLine.

And it was like the first shower I’d had in a week and a half. I was so happy. It’s little things, man. Little things make me happy.

And that was one of the big deals, just getting our power back. And I had huge thanks to the mayor of Goodlettsville, Rusty. He was fantastic helping us out.

EB: Oh, good.

PW: Oh yeah. It was just like to have a mayor actually go underneath your house to help find a leak and go and help out, it was just beyond the call of duty. And boy, I’ll tell you what, it was really, really good to get back online again because it was a rough week.

Bitcoin Isn’t an Investment

PW: So OpenLine. We did something, and I’ll probably get to this later. I’ll talk a little bit about it later.

There were a couple of questions that came up on OpenLine that I thought were kind of fun to talk about. But there were a lot of things going on in the financial world this week, of course.

EB: You might say.

PW: You think? So what was on your radar screen?

EB: No.

PW: Go ahead.

EB: All kinds of stuff. I have to share, I was talking with Cindy this morning, and I said, “I bet the first thing out of Paul’s mouth is going to be, ‘Boy, we have plenty to talk about this week.’” It was just so many dramatic things that both reinforce what we teach as well as the kind of things that can scare people. It was just, there’s a lot of news.

PW: Yeah. Oh yeah, yeah, yeah, yeah. Well, I have to change my joke. I was saying, “What do you call a one third drop in the value of Bitcoin?” And I said, “A good start.” Now what do you call a 50% drop?

EB: Right.

PW: It’s a really good start. But it is funny because there was an article in some publication — I can’t remember where the heck I was reading, I think it was Market Watch — and they were talking about these people, I hate to call them investors. When people talk about people buying Bitcoin, they call them investors. I’m going, “It’s not an investment.”

By definition, you’ve got to have somebody paying to use your money, either paying interest or paying earnings or paying rent or paying something to use your money.

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When you have something that just goes up and down in value based on supply and demand, that’s not by definition an investment. 

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But that’s what they call these people. They call them investors and everything. And so often I’m just going, “Can we change the terminology?”

EB: Right.

PW: It’s more like collectors or something like that. I don’t know if there’s a better word that could be used.

EB: Yeah. Hoarders.

PW: Yeah.

Sunk Cost Fallacy and Bitcoin

PW: Anyway, the whole thing about the Bitcoin going down in value, but their “investors,” or people, collectors or whatever we want to call them, were doubling down and saying, “We’re not giving up on this.” And all I could think of is the psychological concept that you have, the sunk cost fallacy.

EB: Yes.

PW: The idea that if I put money into something and it has gone down in value, it’s really hard to get rid of it. It’s really hard to just say, “Okay, I lost, let’s cut bait and let’s run.” Psychologically, it’s very, very difficult because basically you’re saying that, “Okay, this was a mistake.” Maybe that’s part of it.

But the other part of it is that — and this happened, I remember, when I first started this show in 2001, it was next to impossible to get people to get rid of or let go of tech stocks. They would lose and they’d go, “It’s just coming back. It’s coming back.”

And I’m saying, “So you’re basically thinking that somebody is willing to pay you a large sum of money for this thing that went down in value.” Because you’re thinking it’s going to come back, somebody’s got to pay you what you paid for it.

And the reality of it is, you lost the money. It was valued at a certain level, and then when information came out that told us that those expectations aren’t going to happen, earnings expectations aren’t going to happen, then all of a sudden the price went down to what it should be selling for. So that is a really hard thing to get people over.

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It’s really challenging to get people to overcome this idea that maybe it wasn’t a good idea and maybe it was a mistake. 

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Admitting mistakes is just not something that people are great at.

EB: Yeah. I think another thing at play in that, maybe not so much with the Bitcoin, just because it’s relatively new, there’s not a track record of other failures long term, plenty short term. But on the stock side, when you’re talking about tech stocks, there’s also an element of survivorship bias in investors looking at that because a lot of people were looking at the fact that, say, Amazon in the ’90s had several 50% drops, and then it came back and it came back and it came back.

PW: Yeah.

EB: Well, there were a ton of companies that went under and never came back.

PW: True.

EB: But you’re holding this stock that’s down and you’re like, “Well, it could come back like Amazon did.”

PW: Yeah, that’s a good point.

EB: And you start to carry that over and think, Well, they all recover. And that’s just not true.

PW: Yeah, that’s a really good point. Yeah, there it is.

Bitcoin’s Drop Isn’t Shaking Investors’ Conviction

PW: There’s the article. “Bitcoin’s 50% plunge from highs hurts a little.” I love that headline. It hurts a little, but “it isn’t shaking these investors’ conviction.”

And I’m like, “Well, what will?” I don’t know what will.

EB: Those are the same people that say the world is ending when the stock market’s down 10%, you know?

PW: Yeah.

EB: So that “hurts a little.” It’s 50% off.

PW: Yeah, “it hurts a little.” Yeah.

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Longtime Bitcoin holders are used to its volatility. 

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And that’s kind of like you said, because it did go below like 30,000. I remember it did that and it came back, but the reality is that you don’t know. You can’t predict when it’s going to come back.

The only thing that makes it come back is that people, just longtime holders, decide that they’re just going to start buying and they’re going to push it up or somebody’s going to come in and demand is increased. But there was somebody talking a little bit about that and we’ll get to that. There was some really interesting stuff in the media about that.

But one of the things I wanted to hit early on here — well, now I’ll tell you what, let’s hit this, because this was a topic of conversation right here. Let me play this little clip right here.

Carl Quintanilla: Bitcoin this morning as well, the cryptocurrency coming off a 13% plunge yesterday, worst 24-hour drop in about four years. Nearly broke $60,000 overnight, but that is where it bounced, Jim. A lot of discussion about Fibonacci levels and sort of questions as to why it’s not rallying when so many Fiat currencies are being questioned.

PW: Okay. So Fiat currency is like the dollar or the Euro or something that’s not backed by anything specifically. They say that, but I am going to argue that it is backed by something. I don’t know if, Evan, you’ve ever heard me say this, but the reality of it is, when you say the dollar isn’t backed by anything, it used to be backed by gold, and that was the idea.

Now it is technically backed because what is the job of the Federal Reserve? What is the dual mandate of the Federal Reserve?

EB: Monetary policy and inflation …

PW: Full employment.

EB: Full employment.

PW: Full employment, right?

EB: Yeah.

PW: Exactly. And inflation, making sure that the stability of the dollar is the idea. Okay.

Determining the Stability of the Dollar

PW: So, when we talk about the stability of the dollar, how do we determine that the dollar is stable?

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The criteria for determining whether they’re getting the job done right is if inflation is in check. 

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Now, how is inflation actually calculated? It is calculated by looking at the increase in price of a basket of goods and making sure that the increase in price of that basket of goods doesn’t exceed a certain level.

Now, it’s an imperfect process because you’ve got to look at what people typically buy. You’ll have rents in there, you might have eggs, and you might have food and clothing, you might have electronics.

EB: Gasoline.

PW: Yeah, gasoline. There is a whole host of things that are actually looked at to determine whether inflation is in check.

Now, if the price of those things is not going up too much or it’s in check as far as not being up more than like 2% — that’s the goal, but 3% is kind of what we’ve been dealing with — then the Fed is considered to be doing their job. Now here’s the thing, if all of these things, everything that Evan and I just named — just name anything that might be a basket of goods that you typically buy — if that is staying stable as far as the price of it not going up too much, you have basically backed the dollar, not with just one thing, gold.

You backed it with hundreds of things, rents, electronics, cars, just anything, computers, anything that you might buy. It’s actually backed by all of these things.

And this is something that you think, Well, wait a minute, yeah, it is sort of backed by something if you think about it in that way. Now, so that’s what he’s talking about in terms of a fiat currency, but let’s continue.

Jim Cramer: When I talk to people about the end of Bitcoin, it’s that we thought it was going to be a protection against a weaker dollar, and it went the wrong way.

PW: Now, “We thought it was going to be a protection against the weaker dollar.” Who is “we”? Yeah, not me.

EB: Right.

PW: It wasn’t Evan and I sitting there thinking this is going to be a great idea. But we thought, Well, how often do you guys in the media need to be wrong before you finally just go, “Maybe we don’t have this thing down”? But that was the point right there.

Believing a Story and Not the Data

JC: The story that I’m believing best, and this is one they report next week, and on the conference call, I think you’re going to hear that Ammar Al-Joundi, who’s the CEO of Agnico, has said that the gold flows from … they actually have demographic in age, younger people out of crypto into gold, David.

PW: So that’s the premise now, is what’s happening.

EB: Well, to me, the word that jumped out in that last quote was “story.”

PW: “The story.”

EB: “The story I’m believing,” not data.

PW: That’s a good point.

EB: Not academic research, like, well, yeah. Okay. It’s a good story.

PW: Yeah. No, that’s a really good point. It is. It’s like we make up something.

EB: Yeah. The story your kids tell you, “A monster sawed the legs off the chair. It wasn’t me.”

Okay, got it. Got it.

PW: That’s funny. So he’s talking about where money is flowing and if it’s flowing out of Bitcoin into gold, and that’s driving gold up, what did it flow out of to flow into Bitcoin that made Bitcoin go up artificially for a while and now it’s starting to go down? And will the same thing happen with gold? Just conjecture.

David Faber: I don’t know where the incremental buyers are coming from. They’re showing up a little bit today, perhaps they see —

JC: Well, they’re selling the S&P future so they can buy —

CQ: You did say that they leveraged what? They leveraged the S&P to buy Bitcoin?

JC: Yes, they did.

PW: So one of the things that he just …

EB: Gosh.

PW: Yeah, exactly. You leverage, you’re borrowing money to invest in something. So what I think is interesting right there is if they’re pulling money out, he’s saying they’re pulling money out of Bitcoin and going into gold.

And David is basically saying, “No, not necessarily. Not necessarily.” I think, as a matter of fact, let me continue because I think he says it. Let me hang on.

JC: They didn’t want to sell their Bitcoin, but a lot of them got blown out.

PW: See, there it is. They did say it. Okay, cool.

So if I sell Bitcoin to buy gold, that drives up gold. And he’s saying, “Well, no, they’re not wanting to sell their Bitcoin.”

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But what they’re doing is they’re still investing. They’re just changing where they’re investing. They’re investing in what went up.

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EB: Right.

PW: And it’s like you’re closing that gate after the horse has gone out and you’re chasing something that did well yesterday.

EB: Yes.

PW: And making a different mistake or the same mistake with a different thing.

EB: Yes.

PW: That’s really what’s happening.

EB: Yeah.

DF: And then there’s Michael Saylor at Strategy, formerly known as MicroStrategy, obviously the Bitcoin company —

JC: What the hell does got to do with this?

DF: — that started the whole Bitcoin strategy that still has this credit product called a Stretch.

PW: And he’s out there still defending what he’s doing. And this guy was interviewed all the time and he was, “This is going to go to the moon. It’s going to be great. It’s going to be the best thing ever.”

Fundamentals and Fundamental Analysis

PW: When you think of fundamentals, Evan, when we talk about the fundamentals of a company, what are we talking about?

EB: Well, you’re talking about, to me, the accounting data of what are their earnings, what’s their inventory, what’s their terms of inventory? What’s their gross margin? What’s their earnings before interest in tax?

PW: Absolutely.

EB: The hard data of what’s creating profit for the company.

PW: And what creates value and what determines the cost of capital that we always talk about here. Now, exactly.

When you hear the word “fundamentals,” that’s what we’re talking about. When we look at the fundamentals of a company.

Now there’s something called fundamental analysis, which we heartily disagree with. And the vast majority of investment firms, if you look at their ADVs, I haven’t found one yet that doesn’t have that they use fundamental analysis in determining what to invest in. It’s a waste of time.

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The reason you look historically at it being a waste of time is because everybody knows that information. 

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Everybody knows, everybody can find out what the cash flows are, what the earnings are, what the expenses are, what the plans are for the company in the future, to analyze the fundamentals of a company to try to determine whether it’s a good investment or not. It’s a waste of time. And we know that because 90-something percent of professional managers fail to match market returns. It’s a waste of time.

And the reality is, you don’t have to do that junk to be a successful investor. So, fundamentals, the idea of fundamentals, it’s what gives a company value, as Evan pointed out, but check this out.

DF: And then there’s Michael Saylor at strategy, formerly known as MicroStrategy, obviously the Bitcoin —

JC: What the hell does got to do with this?

DF: — company that started the whole Bitcoin strategy that still has this credit product called a Stretch that they sell that yields 11.25%.

PW: So it’s yielding 11.25%. Yeah, no, who wouldn’t be attracted to investing in that?

EB: In a 3.5% rate environment. Yeah.

PW: Okay. So who wouldn’t be attracted to that? But listen to what it is.

DF: At least paid monthly tax deferred.

JC: They don’t have to worry about that.

DF: Yeah.

JC: We have a couple bills tucked away.

DF: They had their earnings, and Saylor, as you might expect, was answering a lot of these questions involving, well, what happened? Take a listen.

Michael Saylor: Strategy is based upon looking at the fundamentals and taking a 10-year view. And so when you consider the fundamentals of digital capital —

PW: There, that’s all you need to hear. The fundamentals of a commodity? Are you kidding me?

What are the fundamentals of a tube of toothpaste? What are the fundamentals of a piece of artwork? No, it doesn’t apply. When I look at it as something, a collectible that can go up and down …

EB: Yes.

PW: What are the fundamentals of a Beanie Baby?

EB: Right. Yeah. Pure supply and demand.

PW: Exactly.

What’s Moving Bitcoin?

EB: This may end up becoming the first half of the show, but that’s the biggest thing I was thinking about. Thursday, Friday, the big drop on Thursday, and then there’s a recovery on Friday in the digital space, both Ether or Ethereum, whatever, and Bitcoin and so forth.

And thinking there is nothing that should be moving Bitcoin. At least silver has industrial use. Okay, there’s an increased demand for chips.

PW: There you go. Yeah.

EB: Okay. There’s a reason for the price to move, or gold has uses, all those kinds of things.

PW: You could have another thing drive the price up. Very good point. Yes.

EB: And trees, coal, whatever. But Bitcoin, it doesn’t pay interest, so it shouldn’t be interest rate sensitive. There are no dividends, so there are no earnings.

So it’s not like, “Well, earnings went down. We’re not making as many Bitcoins this month.”

It’s just ones and zeros, and yet it still behaves like this radical investment. It really makes no sense to me whatsoever.

PW: And I think what happens is people become euphoric to see the stock market go up, and they buy more Bitcoin as if it’s somehow related. It’s very, very odd.

EB: Yeah.

MS: You have to start with the most important regulator in the entire world.

PW: So basically saying, what would drive Bitcoin up? The most important regulator in the world.

MS: And that is the president of the United States. We have a Bitcoin president, and he’s intent upon making America the Bitcoin superpower, the crypto capital of the world, and the leader in digital assets.

PW: So it’s not a fundamental still, but here’s the point he is making.

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The reason for his optimism is you have somebody that supposedly is behind this. The reality of this is that this person won’t be in office forever.

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EB: Right.

PW: And at what point in time is the writing on the wall that maybe the next person to come along isn’t going to be so optimistic? And you can’t get the heck out of Dodge fast enough on these things.

EB: Right.

MS: I don’t think you can underestimate the importance of having support for the industry and digital capital at the very top.

PW: I think you can. I think you can underestimate it. I think that it is just plain wrong.

What Is Yrefy?

PW: All right. We’re back here on “The Investor Coaching Show,” Paul Winkler, along with Evan Barnard. Okay, so one of the questions that came up on NewsChannel 5+ when I was on there on the OpenLine, a guy was asking about an ad that he’d seen. He says, “Paul, have you heard about Yrefy?”

EB: Fun. Okay.

PW: I said, “I really don’t watch a whole lot. I’ve got cursory watching of TV here and there. CNBC, I’ll check it out in the morning just to see what’s going on in the financial channels, just to see what kind of heresy’s being taught out there.”

EB: Yeah.

PW: But other than that, I really don’t pay a whole lot of attention to things. And I said, “Explain it to me. Tell me what it is.”

He goes, “Well, basically you got student loans, and these people, they refinance distressed or delinquent, default private student loans, and you can get a 10% rate of return and it’s guaranteed, blah, blah, blah.” And I said, “Whoa, whoa, whoa, wait a minute.”

EB: Yeah.

PW: “Wait a minute.” Early days of the radio show, this guy calls in and he says, “Hey, Paul, what do you think about tax liens?” And I said, and I didn’t, quite frankly, this is 25 years ago, I didn’t really know what they were.

EB: Yeah.

PW: I’d never dealt with them at all. And I said, “Well, explain them to me.” I did the same thing with him. And he said, “High rate of return, no risk.”

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I said, “Hey, here’s the deal. If there is no risk, I don’t have to pay you much to use your money.”

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If you’re not putting up with anything, as I like to put it, I don’t have to pay you much. It isn’t the wealthy person that pays high interest rates when they borrow money; it’s the poor person that may or may not be able to pay back the loan.

EB: Right.

PW: That’s the person that’s going to pay a high interest rate, right? So I said, “I’ll look into it.” And I said, “I’ll talk about it on the radio,” and not necessarily buying that this is something that’s going to be legitimate.

Investment Opportunity Promoters

PW: Well, I did do some research on it, and some of the guys here in the office helped me out. Chad helped me out. And what they found was this, it was interesting, there was an article entitled “Fox News Channel, Yrefy LLC, and the State of Massachusetts.”

EB: Oh.

PW: Anytime you get the state involved, that’s probably not a great thing. “On February 3,” it said, “the State of Massachusetts did the unthinkable. In a rare proactive move to protect investors, they filed a complaint against Reg D promissory loan note company Yrefy, LLC — before its inevitable implosion.”

So, “Over six months ago, we issued a report on Yrefy, LLC — a private student debt refinancing company that also promised investors a ‘collateralized’ investment opportunity. According to its offering materials, if investors commit for a five-year hold period, they can earn an annual return of 10.25%.”

So that was the claim, and that was what this guy was asking me about. It says, “Instead the companies rely on imputed credibility.”

Then they’re going through, they said that reports on “Yrefy, LLC spent $5.4 million on national television ad buys, and another $348,000 on radio ads from December 2023 to December 2024 — all to recruit accredited investors.” Those are people that the government deems able to lose money.

EB: Which should tell you something.

PW: Yeah, exactly. Should tell you something. Those are people with enough wealth that the government’s like, “Ah, if you lose a few hundred thousand dollars, no big deal.”

EB: Basically.

PW: “You’ll bounce back.”

EB: Yeah.

PW: “This is the Reg D multifamily equivalent of the ‘New Deal’ or ‘off-market or below-market’ value opportunities … Worse still is the amount paid to individual media personalities. One such personality received $746,000 — on top of the ad buys — to pitch Yrefy’s investment opportunity.”

This article says, “To date, Massachusetts records indicate that Yrefy, LLC has paid 17 TV personalities.” And then a lot of times, I’m just going to tell you, in general, when you have these types of people, they really don’t know anything about this stuff.

EB: No, they’re picking up $750,000.

PW: Yeah, I feel bad for them, as a matter of fact. I see these celebrities, they’re pitching insurance companies, asset management, and then things like that.

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I just go, “If they only knew what these people were actually selling, they would probably be mortified. If they really, really knew.”

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EB: Well, the interesting thing, because you don’t spend as much time in the culture sphere —

PW: Yeah.

EB: — is we both know one of those promoters.

PW: Okay.

EB: It’s a good friend of somebody else we know.

PW: Okay. I won’t ask. All right.

EB: And another one is Larry Elder.

PW: Okay.

EB: I mean, it’s really interesting. And when I first saw him promoting that, and then I started looking through, because he knows what we believe in, it really surprised me.

PW: Oh, yeah.

EB: But to me, it speaks to your point of they’re not really investigating this to see how safe it is, how valid it is.

PW: Right.

EB: It could have been Coca-Cola or Yrefy. Doesn’t matter to them.

Return Without Risk

PW: Well, a good friend of mine, he was in the media world, and he goes around. And he and I have been friends for a long time, but he goes around. He used to go around the country a lot more and teach financial things.

And basically, he talked about being in the media world and talking to Paul Harvey. He wanted to have Paul Harvey actually recommend a product or be an endorser of a product. And he said, “This is how unusual this guy was,” Paul Harvey.

He said he took his client from Nashville all the way to, I think it was Chicago, where Paul Harvey was. And he wanted to have him look at the product. And Paul Harvey looks at it, and he goes, “I’m sorry, fellas. I cannot get behind this.”

And he said, “I was disappointed because I really wanted him to be a spokesperson for the product.” And he said, and I don’t remember the timeframe, but it wasn’t that long after that, there was an implosion in the product, and Paul Harvey was dead-on right. He actually saw right through.

EB: Yeah.

PW: And he was just talking about just how admirable that was, that you had a guy that was so concerned about what he was talking about and what he was endorsing, that that happened. But anyway, aside.

“In the YouTube video,” this guy said, “I outline the averages on the loans we make to our Borrowers; the interest averages about 3.9% with average terms of 8.6 years. The highest interest rate we charge our Borrowers is capped at 5.19%.”

Now, this is an investigation where they received an email from this person from Yrefy and this is what he’s saying. This is from a quote from him. It says, “The highest interest rate we charge our Borrowers is capped at 5.19%—this would be for a larger loan size and typically on a 20-year term,” blah, blah, blah, blah, blah.

This paragraph I thought was telling: “Later correspondence confirmed that 90% of investors chose the five-year note, which pays 10.25% annually. This raises a critical question.”

EB: Yeah.

PW: “How can Yrefy, LLC pay 90% of their investors 10.25%, cover overhead (including salaries), and fund 17 media personalities — when the maximum interest income from its loan portfolio is capped at 5.19%?”

EB: Yeah.

PW: “Even if this average interest income were double, the company would not cash flow. And let’s not forget the $750,000 fine paid to the State of Massachusetts to settle charges that they did not admit or deny.”

EB: Gosh. Maybe it was 10% for all five years.

PW: Yeah. I don’t know.

EB: Maybe it was 2% per year that they were promising.

PW: Yeah, I don’t think so.

EB: No, it wasn’t.

PW: No, definitely not.

EB: Yeah.

PW: But here’s the point.

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Anytime somebody tells you that they’re going to give you something for nothing, that there is return without risk, just run. 

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Don’t walk, run.

EB: Right.

PW: There is no such thing as a free lunch, and yet it sells, and it appeals to people’s desire for that to be true.

I would love to have something out there like that, but let’s just face it, it doesn’t exist. Nobody’s going to pay you more than they have to to use your money, bottom line.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.