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#1: Fear of the unknown
When you know something is inevitable, you prepare yourself for it. When you have no idea, this leads to panic.
And boy, are people panicking right now.
Right now, people are worried about their jobs, their lives and their toilet rolls.
And if you’re self-employed, you’ve probably already had quite a lot of work cancelled. And even if you’re a full-time employee, you might not be faring too much better.
The virus is killing people, and the reaction to the virus has put thousands, likely millions, out of work.
So it’s not surprising they’re pulling everything out of their investments.
Which is why, the current state of the world’s major markets look like this, so far for the year:
• JSE All Share: -30%
• S&P 500: -22%
• Dow Jones: -24%
• Nikkei: -27%
• Dax: -30%
That kind of puts crypto’s -34% fall into perspective.
And while a -34% fall in the space of a couple of weeks is entirely normal in the world of crypto, it certainly isn’t for the JSE All Share, or any of the world’s major stock markets.
#2: Investors need cash urgently
You may have noticed that even gold hasn’t quite lived up to its “safe-haven” status, during the Coronavirus crisis.
This is unusual as gold is the first asset investors buy to protect their wealth.
But here’s the thing…
Reports suggested that losses in equities became so severe over the course of the rout, many investors were forced to sell their gold holdings to meet margin calls.
If you're unclear on "margin call," it's basically when an investor borrows from his/her broker to buy stock, yet the market value of the stock falls, resulting in the broker requiring the investor to deposit additional cash or securities to meet minimum maintenance levels.
So what does this have to do with cryptos?
Well, I suspect the exact same thing happened in the crypto market – investors sold their crypto holdings to free up cash to meet margin calls.
It certainly doesn’t mean, cryptos are bad investments – high risk, yes – but fundamentally the investment case for cryptos is still sound.
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Where do we go from here?
I believe, in the next 3-12 months, the pandemic will come to a major slow down. A vaccine will be created and coronavirus will be relegated to the history books.
But its impact will still be felt for a very long time.
You can’t put millions of people out of work for months on end and expect things to just pick up as normal when the virus is controlled.
However, while “real life” is going to take a very long time to recover, the markets are likely to bounce back much faster. They always do.
And anyone with enough spare capital to do some buying while the prices are tanking will make a fortune.
The crypto market has already jumped around $60 billion since its massive drop. So use falling prices to scoop up more cryptos.
See you next week.
Joshua Benton,
Managing Editor, The South African Investor