Mailbag: Shrinking Stock Market Creates Opportunities; Storing Bitcoin

Editor’s Note: Welcome to the Early Investing Mailbag. Each week, we answer questions we think will help you learn about investing in pre-IPO startups and cryptocurrencies. If you have any questions for us, please email us at mailbag@earlyinvesting.com. Just remember, we can only answer your general questions for information and strategy. We can’t offer personal advice.

Q: Andy, you’ve said more than once that the earlier you invest, the better. How about small public tech stocks? My broker says they have high upside. I get the impression that you think that’s too late. Is it?

A: That’s a loaded question.

Of course, companies of all sizes, sectors and ages are capable of rapid growth. But as a general rule, the earlier you invest, the bigger the reward (for those companies that realize their potential).

There’s more to it than that, though.

The pickings for good young tech companies on public exchanges are getting slimmer and slimmer. The New York Times just wrote about this. It notes that the size of the U.S. stock market is half of what it was in the mid-1990s and a quarter of what it was in the mid-1970s.

As a consequence, fast-rising upstarts are harder to find, according to the article.
The Times based its information on a report from the National Bureau of Economic Research.

Kudos to both the Times and the author of the report, René Stulz, an Ohio State finance professor. On the other hand…

THIS IS HARDLY BREAKING NEWS.

I’ve been saying pretty much the same thing… for more than a year!

This quote comes from an article I wrote last December (which is itself a follow-up of an article I had written several months before that)…

At one time, startups went public early and without a second thought. It was considered a good thing… [but] no longer do these potential fast growers – brimming with promise – automatically go public so early. In fact, it’s becoming rarer and rarer.

In that same article, I also noted “the tiny public microcap population has [also] been decimated, going from nearly 4,000 to just under 1,900.”

The Times got the problem right. But its conclusions are 100 miles off the mark.

The article said the shrinking market “creates opportunities for private equity firms, which have insider access to innovative startups that may never go directly to the public markets.”

That’s true, but it’s not the whole story. And it leads to this clunker: “Meanwhile, Main Street investors are consigned to a less diverse universe than they may realize.”

In an effort to support its errant conclusion, the Times turns to Stulz.

“It’s not possible for the general public to invest in a diversified portfolio of really small, publicly traded companies in the way they could a few decades ago,” Stulz says.

Stulz is absolutely correct. But his statement doesn’t support the Times’ glib conclusion.

What the Times doesn’t get is that everyday investors can access “innovative startups” through crowdfunding campaigns on well-known sites like SeedInvest, MicroVentures, Republic and Wefunder.

Why am I NOT surprised?

So listen up. I believe the shrinking of the public stock market is not cyclical or temporary.
The problem is real and isn’t going away.

It represents a permanent shift in the investing ecosystem.

It’s a shame that the number of small public tech companies is dropping off a cliff. Fortunately, the crowdfunding space is NOT shrinking or going away. It’s getting bigger, and the opportunities are getting better.

It’s where you can build a high-quality diversified portfolio of up-and-coming small tech companies.

Brokers are basically clueless about equity crowdfunding. The next time you speak to yours, fill them in. And if they want to learn more about this growing investment space or access research on some of the best early-stage startups around, mention our names.

  • Early Investing Co-Founder Andy Gordon

Q: Is it safe to keep my cryptocurrency on an exchange?

A: It depends. Crypto purists believe that you should never store your coins in an exchange. They strongly advise users to get a hardware wallet (like the Ledger or Trezor) and store it in an extremely safe location. They say you don’t truly own your coins unless you hold the private keys yourself.

There’s a lot of truth there. Ideally, we should hold our own crypto. Cryptocurrency is designed to cut out middlemen and banks. Exchanges are essentially crypto banks. So you’re putting your trust in a corporation.

However, I believe storing coins in a secure, insured exchange is the right choice for some people. Users who are not tech-savvy may want to store their coins this way. People who frequently get computer viruses should consider this option as well. If you tend to lose things or don’t have a secure place to store a hardware wallet, choosing a solid exchange is a viable alternative. And if you own only a small amount of crypto, an exchange also makes sense. It doesn’t make sense to spend $100 on a hardware wallet if you have only $100 worth of coins.

Naturally, picking the right exchange is important. The exchange you pick needs to have a rock-solid security reputation and an excellent “cold storage” strategy. In my opinion, Coinbase is the best option. (I know it’s not perfect – and customer service can be painfully slow to respond.)

But Coinbase has been around a long time. And it has an extremely secure storage setup – with 98% of all coins kept offline in “cold storage.” Coinbase’s vaults are spread throughout the country, and they’re insured from theft (though this doesn’t cover someone hacking you).

Coinbase also offers a “vault” feature, which adds an additional layer of security. Any withdrawal takes three days to process, and you’ll be emailed to confirm the withdrawal. So even if someone gets into your account, they can’t get away with the goodies.

At this stage in crypto’s evolution, I believe custody solutions like Coinbase’s are very important. Many people don’t have the skills or inclination to use a hardware or paper wallet. And that’s OK.

So if you don’t feel comfortable managing your own crypto, then yes, it’s OK to use an exchange. Just be sure to do your homework, use very secure passwords and always enable two-factor authentication.

  • Early Investing Co-Founder Adam Sharp

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