A better investment than crypto currency: FNGU

Let’s face it…Bitcoin, as well as all crypto currencies, suck as an investment. Every time it looks like it is recovering, it drops $400-600+ for no reason:

It goes up a lot for a brief period of time, a tiny number of people make money, and then it crashes and many more people lose money than made any. Yeah, an obvious exception to this is if you bought it in 2010-2016, but that is not most people. Most people came too late and will likely never recover their initial investment.

As it keeps dropping, the number of people underwater will keep rising. A retest of $6,000-7,000 is in the cards, and possibly as low as $4,000.

Here is a better investment:

FNGU (see fact sheet) is a brand-new ETF that is a 3x leveraged version of the popular FANG stocks. It includes Tesla, Amazon, Google, Facebook, Netflix, as well as others, all equal weighted. The compounding effect of the 3x leverage is why it’s superior. Given that I anticipate FANG stocks to post annual returns in excess of 20% a year for many decades to come, this works out \(1.2^3\), or roughly a 73% annual compounded return. But Bitcoin was up 1000% in 2017. Yes, but Bitcoin was down in a lot in 2014, 2015, and 2018, and also Bitcoin has much more volatility. A 73% yearly return compounded over 4 years is an 800% return, roughly the same return as Bitcoin between Nov. 2013 ($1,000) and now ($9,700) but with much less volatility. Instead of the returns being compressed to a single year (2017), they are spread out among four. Pre-2014 Bitcoin returns can be treated as a one-off anomaly and will not be repeated, simply because it would imply Bitcoin is 100x bigger than the combined wealth of the global economy, which is a nonsensical assumption.

3x index ETFs have many advantages, as discussed here.

To understand why 3x ETFs are so effective, consider ‘Bob’ has a $10k trading account and uses 200% margin, giving him access to $30,000 of total trading capital. He then buys the FANG stocks, which go up 20% a year for 5 years. This is a \(1.2^5\) ~ 150% return, giving him \(30,000*1.2^5\) ~ $74,600. After subtracting the $20,000 loan, Bob is left with $54,600, or a return of capital of about 446%. However, but ‘Tom’ buys FNGU instead. After 5 years he has \( [10,000*(1.2^3)^5]\) ~ $154,000, a 15.4x return, which is 3x as much a Bob. That is the power of 3x compounding.

But it gets worse for Bob. That $20,000 he borrowed is not free. He pays a 5% interest on it, because he’s borrowing at an unfavorable rate from his broker. So that is $1,000/year for five years, or $5,000. FNGU, being that it’s backed by a major financial institution, pays for its leverage at a much more favorable rate around ~2%/year. For a 3x ETF, this means 4% is lost annually due to borrowing fees. Another 1%/year is lost due to management fees. Due to borrowing costs, it’s evident that levered strategies don’t do as well in high interest rate environments, which is a risk. This brings Tom’s return to $120,000 and Bob’s to $50,000, so Tom is still well ahead but not as much.

Bob also faces liquidation risk (margin call) if his stocks fall too much (about 33%), but Tom does not have that risk. The worst that can happen is FNGU asymptotically approaches zero. This means FNGU effectively has a built-in put option.

There is the issue of volatility decay, but in uptrends and for indexes (as opposed to commodities) it’s not as bad as it seems. When calculating volatility decay, one must used realized volatility, not vix volatility. The former is often a lot less.

Now obviously there is risk due to the 3x leverage. In 2008, a hypothetical version of this fund lost 80% of its value. If there is a bear market this fund will fall a lot, no question, but I don’t think there will be a bear market for a long time. But Bitcoin as of now is down 64% from it’s high of 20,000. A hypothetical backtest of FNGU has been shown to produce equal returns as Bitcoin but with less volatility. If given a choice between these two speculative and volatile investments, FNGU is superior.

Disclosure: I own FNGU