Category: Investments

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Initial Coin Offerings – Risks and Rewards


 
A friend of mine, a big fan of the Harry Potter series, recently planned to launch an initial coin offering (ICO) to fund a new Quidditch sports league. His new “Quidcoins,” valued at 0.009 bitcoins (BTC), would be exchangeable for discounted admission and food at select National Quidditch games around the country. He hoped to raise a maximum of 2,000 BTC ($11,000,000) over a 28-day offering period.
 
Unfortunately, before my friend could organize his company and raise money, he discovered that a group in Britain was in the midst of offering their own QuidCoins, named after the slang word for the British pound. While my friend was disappointed to find the name taken, perhaps it was for the best; despite sponsors’ hopes, QuidCoins traded for less than three months in 2014, according to CoinMarketCap.
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ICOs promise big profits to investors, but with a failure like QuidCoin’s possible at any time, are they worth the risk? If you’ve been considering participating in an ICO, here’s what you need to know.

What Is an ICO Financing?

Entrepreneurs have historically financed their ideas by offering equity interests — or investment securities — in their ventures to external investors. Due to the abuses and corruption of financiers in the 1920s, Congress passed the Securities Act of 1933 and created the Securities Exchange Commission (SEC) the following year to enforce the Act.
 
In the decades since, the process of raising money from the public through an initial public offering, or IPO, has become well-established. Regulations dictate how the offering process must proceed, who is eligible to participate, when an offeror must provide information to potential investors, and what information they must provide. Failure to follow regulations can result in severe financial liability for the sponsors of an offering, including civil and criminal penalties.
 
An ICO is a similar fundraising tool in which an offeror sells futures in a cryptocurrency that does not yet exist. ICOs are designed to avoid the regulations that protect investors when buying or selling traditional investment securities. While an IPO must include an extensive prospectus, there are no regulations outlining what information must be provided to prospective investors in an ICO. Each offeror determines what, if any, details will be delivered and when.
 
Most ICOs have a website or white paper justifying the benefits of the investment, but they do not have an existing product. Offerers are startup operations, and the funds raised through the ICO will finance the development of the product — in this case, the cryptocurrency.
 
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What is a P/E Ratio and Why Does it Matter?

Stock investors are constantly searching for ways to determine whether a stock is under- or over-valued. Logically, they seek to buy securities in companies that are under-valued and sell the securities of companies that are over-valued. The Price Earnings (P/E) Ratio is a common way to quickly assess how investors value a company based upon its future earnings projection.

Calculation of P/E Ratio

The P/E ratio is the result of dividing the common stock market price by its reported or projected earnings per share. For example, the common stock of XYZ Corporation sells for $22 per share. The latest reported annual earnings are $1.75 per share. The P/E ratio of XYZ would be 12.6 ($22 divided by $1.75). Price earnings ratios are used to compare different companies or the same company over different time periods.
 
Companies with higher P/E ratios are expected to have higher rates of future earnings growth. For example, web-based Amazon (AMZN) had a P/E ratio higher than its brick-and-mortar competitor Walmart (WMT) even though the latter’s earnings per share (EPS) were more than seven times greater than Amazon’s in 2015. Simply stated, investors are willing to pay more today for a dollar of Amazon’s earnings than a dollar of Walmart’s earnings because they believe Amazon’s earnings per share in the future will grow faster than Walmart’s.
 
P/E ratios can vary substantially based upon the earnings components used to calculate the ratio. Most analysts seek to understand and project operating earnings, rather than total earnings that may include extraordinary events unlikely to recur.
 
In the example of XYZ, the reported earnings of $1.75 per share included the sale of a division that added the equivalent of $0.30 per share to the final earnings result. Securities analysts typically deduct the financial impact of extraordinary events to arrive at a true operating profit. In this case, reported earnings of $1.75 would be reduced by $0.30 to get operating earnings per share of $1.45 and the newly calculated P/E ratio would be approximately 15 ($22/$1.45).
 
Price earnings ratios can also vary according to three factors:
 

  • Trailing Actual Earnings. Earnings may be for the latest reported calendar year or adjusted as each quarter is reported. For example, a year includes quarters 1, 2, 3, and 4 of the most recent year. When the first quarter of the new year is reported, the analyst would omit quarter 1 of the previous year and add quarter 1 of the current year so the annual earnings would include quarters 2, 3, and 4 of the previous year and quarter 1 of the current year. This approach ensures that the analysts are using an earnings figure for the most recent 12 months.

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  • Projected Earnings. Sometimes referred to as a “Forward P/E,” the earnings figure is based upon an analyst’s estimated earnings per share over the next 12 months. The projected earnings may be the opinion of a single analyst or a consensus of a number of analysts. It is important to know who is making the estimate and that person’s qualifications to ensure that projected earnings are realistic.

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  • Combination of Actual and Projected Earnings. Some analysts may use two quarters of actual earnings and two quarters of projected earnings to arrive at an earnings per share number.

 

Testing the Validity of the Price Earnings Ratio

Theoretically, companies with higher rates of annual earnings growth have higher P/E ratios. From time to time, investor optimism pushes the price of a security to unrealistic highs with expectations of excessive growth. Using the Price/Earnings Growth (PEG) ratio is a quick and easy way to determine whether the P/E ratio is justified or if a security is over-, under-, or fairly priced based upon your expectation for its average annual growth during the next five years.
 
The PEG is calculated by dividing the Price Earning ratio by the projected annual five years earnings growth (a three-year period can also be used if desired). For example, Company B’s stock selling at a 13 P/E with an estimated annual growth rate of 25% per year would have a PEG of 0.52 (13/25) while Company A’s stock selling at a 10 P/E with an estimated annual growth rate of 25% would have a PEG of 0.4 (10/25). Analysts consider a ratio less than 1.0 as under-valued, equal to 1.0 fairly valued, and over 1.0 as over-valued. While the shares of both companies are undervalued based upon their projected earnings growth, Company A would be the better purchase due to its lower PEG ratio.
 
As with all indicators, neither the P/E nor the PEG are completely reliable, especially since stock prices are rarely rational in the short-term. It is this volatility that provides opportunities to buy and sell.
 
Nonetheless, it’s important to recognize that companies with very low earnings can provide skewed results. It is much easier for a company earning a million dollars to grow 100% per year for five years to $16 million than a company earning $100 million to grow to $1.6 billion in profit. When establishing a projected earning growth rate, consider your own common sense as well as any public estimates of growth from reliable analysts.

Limitations of the P/E and PEG Ratios in Analysis

Both ratios are simple and easy to calculate, but are best used as general indicators of value due to their superficiality. Their limitations in deterring value include the following:

  • Calculations of Company Earnings Are Complex and Frequently Managed by Corporate Executives. Accounting and tax rules are complicated and constantly changing, making comparisons between earnings of different periods and companies difficult. Since the market typically rewards higher P/Es to companies with a trend of consistent earnings growth than companies with erratic earnings, corporate executives try to manage reported earnings to meet investor expectations and maintain high stock valuations.
  • High Growth Rates Cannot Be Extended Indefinitely. Extraordinary earnings growth is difficult to achieve as companies mature. Competitors recruit company employees, leapfrog technologically, and capture market share from industry leaders. Additional suppliers generally reduce product or service prices and profit margins. As companies grow larger and grow staff, reacting to changing market conditions is more difficult, making them more vulnerable to those very market conditions.
  • P/E Multiples Tend to Fall Over Time. Earnings projections tend to be optimistic. When earnings projections are not met, ratios tend to contract.
  • Some Companies Are Not Valued Based on Their Earnings. Entrepreneurial companies like Facebook (FB) and Amazon spend heavily in their early years to capture a dominant market share, thereby delaying earnings. Natural resource companies invest heavily in exploration activities to find assets that will be converted to cash in future years. Since those activities are generally expensed in the year they occur, the company produces accounting losses even though assets may grow signficantly.
  • Financial Leverage Impacts Earnings. P/E ratios consider only the equity of a company, not its entire capital base. Leverage, using debt in the capital structure, increases shareholders’ risk since debt has a multiplier effect when earnings on the borrowed capital exceed the cost of that capital. Conversely, when the rate of earnings is lower than the cost of borrowed capital, shareholder losses are exaggerated. Looking at a P/E ratio without considering the debt owed by the company often leads to invalid results.
  • P/E Ratios May Be Misleading. While a low P/E ratio may indicate an under-valued, over-looked opportunity for profits, it can also mean that the company’s earnings will decline in the future and astute investors are selling the stock to avoid losses. Relying on P/E ratios alone to buy or sell stock is a risky and foolish practice.

Final Thoughts

P/E ratios are excellent tools for a superficial analysis such as determining which company in an industry to further investigate or selecting one industry over another. Nevertheless, it is important to ascertain the underlying reasons for a multiple before making an investment decision.
 
In the short-term, stock prices can be very volatile since they reflect investor hopes and fears. For example, a suspected change in an analyst’s opinion or rumors about the economy, an industry, a company, or its competitors affect stock prices and P/E multiples whether valid or not. P/E and PEG ratios should always be used with other metrics before taking investment action.

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Understanding Block Chain Technology – How It Will Change the Future


In November 2008, an anonymous author using the pseudonym Satoshi Nakamoto issued the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System,” which outlined “a system for electronic transactions without relying on trust.” This system, known as blockchain, became the basis for the world’s first widely accepted cryptocurrency, bitcoin. It’s also a foundational technology that has the possibility to impact society as dramatically as the invention of the Internet itself.
 
Don Tapscott, author of “Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World,” claimed in an interview with McKinsey & Company that blockchain is “an immutable, unhackable distributed database… a platform for truth… a platform for trust.” An unapologetic, enthusiastic supporter of blockchain, he adds, “I’ve never seen a technology that I thought had a greater potential for humanity.”
 
Is the hype around blockchain justified? Let’s take a look.

The Dangers of Digital Transactions

Mutual trust is the basis for business transactions. Yet as society has grown more complex, our ability to trust another party — especially if they’re unknown and halfway around the world — has decreased. As a result, organizations develop elaborate systems of policies, procedures, and processes to overcome the natural distrust arising from the uncertainties of distance, anonymity, human error, and intentional fraud.
 
At the heart of this distrust is the possibility of a “double spend,” or one party using the same asset twice, particularly when the assets being exchanged are digital. When exchanging physical assets, the transaction can only occur at one time in one place (unless forgery is involved). In contrast, a digital transaction is not a physical transfer of data, but the copying of data from one party to another. If there are two digital copies of something for which there should be only one, problems arise. For example, only one deed of the ownership of a house should be applicable at a time; if there are two seemingly identical copies, two or more parties could claim ownership of the same asset.
 
Unfortunately, the systems and intermediaries required to ensure, document, and record business transactions have not kept pace with the technological changes of a digital world, according to Harvard Business Review.
 
Consider a typical stock transaction. While the trade — one party agreeing to buy and another party agreeing to sell — can be executed in microseconds, often without human input, the actual transfer of ownership (the settlement process) can take up to a week to complete. Since a buyer can’t easily or quickly verify that a seller has the securities the buyer has purchased, nor can a seller be confident that a buyer has the funds to pay for that purchase, third-party intermediaries are required as guarantors to ensure that each party to a trade performs as contracted. Unfortunately, these intermediaries often add another layer of complexity, increase costs, and extend the time it takes to complete the transaction.
 
Our existing systems are also vulnerable to intentional attempts to steal data and the assets they represent. International Data Corporation reports that businesses spent more than $73 billion for cybersecurity in 2016 and are projected to exceed $100 billion by 2020. These numbers don’t include security expenses for non-businesses or governments, the cost of wasted time and duplicated efforts due to data breaches, or the expense of any remedies to those affected.
 
Blockchain technology presents a remedy for these issues that could significantly alter the way we do business in the future.

How Blockchain Technology Works

Understanding blockchain requires an understanding of “ledgers” and how they’re used. A ledger is a database that contains a list of all completed and cleared transactions involving a particular cryptocurrency, as well as the current balance of each account that holds that cryptocurrency. Unlike accounting systems that initially record transactions in a journal and then post them to individual accounts in the ledger, blockchain requires validation of each transaction before entering it into the ledger. This validation ensures that each transaction meets the defined protocols.
 
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10 Ways to Protect Your Privacy Online

Who knows the Evil that lurks in the hearts of men?
In May 2017, more than 230,000 computers around the world were taken hostage by the WannaCry malware worm. Known as ransomware, the unknown developers surreptitiously gained control of computers running the Microsoft Windows operating system, encrypted the users’ data, and demanded a payment of $300 in untraceable bitcoins to unlock the system and access information.
 
Cyber-attacks occur across borders and range from simple email “phishing” efforts to sophisticated software programs that quickly expand the attacks and hide the identity of the perpetrators. Motives of cyber criminals range from vanity (proving one’s technical expertise) to illegal profit. Some attacks are politically motivated while others are rarely publicized, state-sponsored sabotage. The attacks affect individuals, businesses, and governments.
 
According to a report by the Ponemon Institute, a successful hacker earns $14,711 for each attack and has 8.26 successful attacks per year. Sophisticated hacking tools are readily available on the Internet, especially the Dark Web. The criminals and the curious are stepping up their efforts to invade your privacy and steal your money. What actions can you take to harden the target and protect your assets?
 
What actions can you take to harden the target and protect your assets?

Understand the Enemy

Malicious software can wreak havoc on your computer or operate covertly in the background. Malware (The Creeper Worm) was first detected on the ARPANET, the forerunner of the Internet, in the early 1970s. Since that time, spurred by the growth of personal computers and connected communication networks, many different types of malware have appeared, including:
 
Trojans: The most common malware is based on the Greek strategy to invade Troy: the Trojan Horse. In this case, users are tricked into allowing an outsider unlimited access to their computers by clicking on an unsafe Internet link, opening an email attachment, or completing a form. By themselves, Trojans are delivery vehicles, providing a “backdoor” into a computer or network. As a consequence, they open the door for malicious software to steal data, compromise operating systems, or spy on users. Trojans do not replicate themselves and spread to other devices like a virus or a worm.
Viruses: Just as a biological virus is transmitted to unsuspecting hosts, a computer virus replicates itself and infects new computers, then modifies operating programs to malfunction. Some have called viruses “diseases of machinery,” a term first coined in the 1972 futuristic film “Westworld.” One of the early viruses – Love Letter – delivered by an email with the subject line “I Love You” and an attachment “L0VE-LETTER-FOR-YOU.TXT” – attacked 55 million computers worldwide and caused an estimated $10 billion in damage, according to Wired magazine.
 
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