Cryptocurrencies Gambling or Investing?

DO DILIGENCE QUIET FOUNDATION HELPS PROACTIVE INVESTORS UNDERSTAND THEIR PORTFOLIOS

Lucky Gambling Stocks

By James Blakeway

T

here was a time when Americans who felt the itch to gamble packed a bag and flew to Las Vegas to revel in one of the few meccas of legal gambling on the continent. Failing that, they could make a cash bet with a buddy that Michael Jordan would score more than 30 points that night.

But times have changed. More states have legalized gambling and online sports betting, paving the way for companies to cash in on Americans’ love of wagering.

That brings opportunities for investors because some of the nation’s top gambling firms are publicly traded. It provides a sub-sector for diversification, but keep in mind that investing in gambling firms represents another bet on discretionary consumption.

For investors looking to stick with the traditional Las Vegas companies, stocks offer access not just to casino profits but also to a post-COVID resurgence in tourism.

Publicly traded firms own the largest brands on the Las Vegas Strip. In the traditional hotel and casino market, investors can choose among shares in Caesars Entertainment (CZR), Wynn Resorts (WYNN), MGM Resorts (MGM) and Las Vegas Sands (LVS).

Both Caesars and MGM have more than recovered from the slump of early 2020, while Wynn and Las Vegas Sands both saw their peak prices in 2018 and have not touched them since.

Macau and beyond

Of the four companies, Las Vegas Sands is betting the most on international markets. Despite still trading on the New York Stock Exchange, many of Las Vegas Sands’ properties are now located in Asia, with five in Macau and the iconic Marina Bay Sands in Singapore.

Keep that international concentration in mind. With the company’s stock well below its 2018 high of $81.45, investors may find upside opportunities as the tourism industry continues to recover around the world.

For other exposure to the Macau gambling market, investors can analyze Melco Resorts (MLCO), which trades on the NASDAQ. Much like Las Vegas Sands, Melco is above the 2020 lows but still far from its 2018 peak of $32.95.

While many still consider Las Vegas the gambling hub of the country, wagering-oriented firms continue to expand across the nation. States continue to relax gambling bans and restrictions, happy to accept the tax revenue and economic opportunities that gambling affords.

Two companies that stand out are Boyd Gaming Corp. (BYD)

While many still consider Las Vegas the gambling hub of the country, wageringoriented firms continue to expand across the nation.

and Penn National Gaming Inc. (PENN). Both operate portfolios of casinos across the country. In January 2020, Penn acquired a 36% stake in Barstool Sports, and the companies launched Barstool Sportsbook in September. They plan to continue expansion of their online sports-betting business. Both Boyd and Penn saw massive rallies in their stock price from the middle of 2020 to early this year before recent pullbacks.

Investors looking for a more direct sports-betting investment can look to DraftKings Inc. (DKNG), which IPO’d via a SPAC (special-purpose acquisition company) merger in late 2019.

Since then, DraftKings’ shares experienced a volatile rise to a high of $74.38 in March. Investors feeling bullish on the company’s continued expansion into new markets and product offerings may wish to take advantage of any steep slumps in the stock price.

Longer-term, investors should keep their eyes on California in 2022, when sports gambling will be up for legalization via ballot initiative. Legalized sports gambling in the country’s most populous state would be a game-changer for companies.

Exchange-traded funds

In many industries and subindustries, exchange-traded fund provid-

Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.

DraftKings as royalty

Stock prices for DraftKings Inc. far outpaced other gambling industry stocks.

DKNG

PENN

BYD

CZR

MGM

WYNN

LVS

MLCO 500%

400%

300%

200%

100%

0%

Jan 2020 Mar 2020 May2020 Jul 2020 Sep 2020 Nov 2020 Jan 2021 Mar 2021 May 2021 Jul 2021 -100%

Data as of June 23

ers capitalize on the chance to offer a bundled investment option. That holds true for the gambling industry with VanEck offering the VanEck Vectors Gaming ETF (BJK).

The fund holds 40 national and international gambling firms, including all of the stocks mentioned above. The ETF seeks to track the MVIS Global Gaming Index but does so with a higher expense ratio (0.65%) than a typical index ETF.

Additionally, the VanEck ETF saw an average of only 49,000

More Alpha

Boost your portfolio’s return shares traded per day in 2021, often trading with a $0.20 bid-ask spread. That combination of a higher expense ratio and lower liquidity could make investors wary.

Instead, investors may choose to allocate capital across a variety of gambling-focused firms. Most of the stocks listed here cost $100 per share or less, making diversification an easier endeavor for small accounts in the new age of zero stock commissions.

Larger bullish traders, comfortable with the risks of short put options, may look to sell puts in Las Vegas Sands and Melco Resorts, both of which show negative returns for 2020 and 2021. As indicated, this is a bet that tourism and gambling will bounce back in Asia, especially in Macau.

Despite the recent pullbacks in DraftKings and Penn National, some traders may still believe the stocks are overvalued. Those with bearish outlooks may consider long put spreads or long put calendars as a strategy, given the current low implied volatility.

Options traders looking for ideas to enhance their positions and add new diversified trades may be interested in Alpha Boost. This upcoming service from Quiet Foundation will analyze a portfolio and present options trade ideas in names like Las Vegas Sands and DraftKings, as well as other liquid stocks and ETFs.

While it can be tempting to go all-in, remember to stay diversified, never bet it all on black and always do your due diligence.

James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors. @jamesblakeway

What happens in Vegas...

Publicly traded firms own the largest brands on the Las Vegas Strip. Data as of June 23, 2021.

Company Caesars Entertainment Wynn Resorts MGM Resorts Las Vegas Sands Melco Resorts Boyd Gaming Penn National Gaming DraftKings

Symbol CZR WYNN MGM LVS MLCO BYD PENN DKNG

Notable Properties / Businesses

Caesars Palace Paris Hotel Harrahs Flamingo Planet Hollywood Wynn Las Vegas Wynn Macao Encore Boston Belagio Mandalay Bay MGM Grand Mirage The Venetian (Las Vegas & Macao) Marina Bay Sands (Singapore) The Plaza & Four Seasons (Macao) City of Dreams Macao Studio City Macao Fremont Ameristar Gold Coast B-Connected Sports Barstool SportsBook Hollywood Casino Group Boomtown Casino Group DraftKings Sportsbook Draftkings Casino

2020 Return 24.5% -18.1% -4.6% -12.0% -22.5% 43.4% 237.9% 335.1% YTD Return 39% 11.6% 36.9% -10.5% -7.9% 42.1% -11.1% 8.5%

THE TECHNICIAN A VETERAN TRADER TACKLES TECHNICALS

Cryptocurrencies: Gambling or Investing?

By Tim Knight

M

ost people can’t help wanting to parlay a small investment into a windfall. So they buy real estate, procure precious metals, execute options trades or bet on horse races.

At one extreme, they make reasoned, logical, fact-based investments. At the other extreme, they risk their bankrolls on reckless wagers with a good chance of failure and a small chance of an outsized return.

What distinguishes an “investment” from a “gamble” comes down to a personal judgment based on experience, values and even religious upbringing.

Most visitors to Las Vegas are clearly gambling and, on the whole, losing money. That’s because multi-billion-dollar corporations haven’t set up shop in the desert out of the goodness of their collective hearts. They’re there to make money.

Yet with sufficient knowledge of games of chance and enough experience, some players could be considered investment professionals.

At the same time, straitlaced puritanical critics view the simple act of purchasing common stock with the intent of holding it for years as “gambling.” They even utter the word with contempt.

Gambling or investment?

In the world of investment, observers don’t think of a decision as “gambling” if it’s backed with knowledge, has an appropriate risk/reward ratio and there’s a commitment to longevity.

“Gambling” can even have a positive connotation if it means the execution of a relatively short-term, well-reasoned decision based on probabilistic outcomes.

And one of the most appealing new vehicles to do just that is cryptocurrencies. Investors don’t need to understand the technical details of how crypto works to succeed, but it helps to have a basic grasp of these financial instruments.

Good as gold? Better!

When crypto burst upon the scene a few years ago, some viewed it as a digital form of precious metals. They lauded it as a hedge against inflation, a refuge from the frailties of fiat and a seething rebuke to the authority of central bankers.

But crypto’s even better than that. As an investment, it has some tremendous advantages over the physical world of precious metals.

Specifically: n Extremely tight bid/ask spreads. For crypto, these are virtually non-existent, whereas the bid/ask with physical gold feels as though it’s a mile wide. Traders who stroll into a precious metals shop or execute an order with a large retailer instantly lose between 5% and 15%. That’s the difference between what a buyer pays a shop and what a shop pays a seller—in other words, retail versus wholesale. n Around-the-clock access. What if it’s Saturday morning and someone suddenly feels a desperate need to sell a stockpile of gold bullion? Well, tough. They’ll have to sweat it out for 48 hours until a dealer opens on Monday and then sell it for whatever

the price happens to be by the time opening rolls around. They could sell crypto anytime the mood strikes, day or night, 365 days a year. n Size of movement. Crypto has moved hundreds, thousands or even tens of thousands of percentage points over the years, whereas precious metals have, relatively speaking, hardly budged. That’s exciting when it goes up, but it can fall much more swiftly than more standard investments, as multiple instances of 50% plunges have illustrated. However, crypto has proven vastly superior to most investment vehicles in its capacity for larger returns, even without leverage.

An insular world

So what does crypto have to do with a large alkaline body of water in the West? Well, airline passengers flying above the state of Utah often glance out the window to see the Great Salt Lake.

It’s huge and impressive, but it’s a mere remnant of Lake Bonneville, which once covered what is now the massive Bonneville Salt Flats.

This Utah “sea-change” can serve as a metaphor for crypto. The money flowing into crypto pretty much goes in one direction. The reason is simple: It’s an enormous task to make it flow in the other direction.

Yes, some services permit relatively easy conversion of crypto into fiat. But most fiat that’s been turned into crypto simply remains in crypto-land, either locked away in digital wallets or being converted from coin to coin. It constitutes a veritable financial sea unto itself.

Changing crypto into green cash to spend at Whole Foods requires a whole series of steps. It takes effort, it takes time and, generally speaking, it’s a hassle that most people would prefer not to endure.

So, not many people make deposits into crypto accounts with the idea of hopping between spendable fiat and crypto. The money goes in and does the only thing it’s capable of doing easily, which is being

Cryptocurrencies have some tremendous advantages over the physical world of precious metals.

converted from one coin to another.

Thus, the gigantic Lake Bonneville represents the $6 trillion that the Federal Reserve Bank created and has found its way into all manner of assets.

The fraction that remains— symbolized by the much smaller Great Salt Lake—is the $2 trillion of various cryptocurrencies out there.

The rest of the “water” has retreated elsewhere for other more traditional purposes, such as buying houses, cars, groceries, gasoline, vacations and equities.

But the isolated body of water surrounded by hostile desert isn’t going anywhere. Think of it as an island made of water, so to speak, conjured from the largesse of the Fed. Because otherwise, it simply would not exist.

Another crypto metaphor

Here’s a way of thinking about crypto as a tool for successful gambling. Imagine a hodgepodge of lakes—hundreds of them. Let’s call a huge one Lake Bitcoin. Some are smaller but still substantial, including Lake Ethereum, Lake Cardano and Lake Litecoin. Some seem like tiny puddles at risk of evaporating in the midday sun.

Meanwhile, people scurry around on dry land, pitchers in hand, ready to scoop water out of one lake and into another. Some don’t bother and simply leave the water where it is. Others move water actively.

But the size of each lake changes constantly, growing larger or becoming smaller. Sometimes the entire region benefits from a huge rainstorm of fresh fiat. Other times, a scorchingly hot day diminishes the bodies of water, much the way the entire crypto market shrinks when China threatens to ban crypto for the umpteenth time.

Those who choose to “gamble” in this metaphorical universe most likely will prosper if they figure out which lakes will become larger and which will grow smaller. It’s all because Fed Chair Jerome Powell opened the heavens and dumped a diluvial cataclysm.

Chart-friendly crypto

One vitally important characteristic of crypto trading that aids good judgment and discourages of wild guesses is this: It’s chart friendly.

What that means in this context is that, simply stated, cryptocurrencies appear to “obey” classic lessons and methods of technical analysis far better than any other markets. The reason, almost undoubtedly, is that cryptocurrencies operate in a classic, organic market. Indeed, there is probably no market more purely classical than crypto.

Think of the stock market since the year 1987. Only a fool would believe that the federal government hasn’t had a tremendous influence over equities during the past third of a century.

Between the trillions of dollars the government has spent on quantitative easing, the “Plunge Protection Team” created following the 1987 crash, the endless speeches, programs and tax regulations directly in support of creating a “wealth effect,” it has reached the point—as it did years ago in Japan— that the government has vastly more influence over the ups and downs (but mostly ups) of the market than the general public does.

Crypto, on the other hand, is a classic market of buyers and sellers, supply and demand, booms and busts—all without the meddling of an exogenous governing force which is “just trying to help.” Take note of the two crystal clear examples in Spring into bitcoin, on p. 60.

First, the red circle shows a trendline break, which warned of an immediate drop in price of literally 50% in a matter of weeks. The second, marked with the green arrow, shows how important support was provided by a trendline spanning several years. Simply stated, when it comes to crypto, technical analysis works.