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Rising 10-Year Treasury Note Yields

Rising 10-Year Treasury Note Yields

Interest rates, or the price of borrowing money are a key element of any modern economy. I keep a weather eye on the ten year US treasury note yield.

Treasury yields don’t just influence how much the government pays to borrow and how much investors earn by buying government bonds. They also influence the interest rates that individuals and businesses pay to borrow money to buy real estate, vehicles, and equipment. Treasury yields also tell us how investors feel about the economy. The higher the yields on long-term U.S. Treasuries, the more confidence investors have in the economic outlook. But high long-term yields can also be a signal of rising inflation in the future.

https://www.investopedia.com/terms/t/treasury-yield.asp

As I write this the 10 year treasury yield is 1.73%. This is absurdly low from a historical perspective. For example, back in June of 2007 the 10 year yield was at 5.3%.

As you can see from the chart below, interest rates have been grinding steadily downwards for the past 20 plus years.

The 10 year yield bottomed out at 0.398% in March of 2020. Since then the 10 year yield has risen rather rapidly.

I think most people would agree inflation is at least about 2% per year. I don’t know what the real rate of price inflation is, but I suspect it is north of 2%. But for the sake of argument we’ll say dollars are worth 2% less each year.

So for the privilege of loaning the government money for 10 years, you’re going to get 1.73% in interest, even though the dollars will be worth 2% less. Now getting 1.73%, all else equal, is better than getting 0%. But it still doesn’t make sense that effective or real interest rates are negative, because while nominally you would be get more money back from the government, in real terms, you’d be getting paid back less. A normally functioning market isn’t supposed to work this way.

Interest is first supposed to compensate the lender for not having access to that money and two, to compensate them for the risk they are taking because the borrowing might not repay the loan and the lender might lose part or all of the money loaned.

In a free market, rising interest rates would be fine. It would just mean that lenders are demanding higher compensation in exchange for loaning their money.

Because US markets are unhealthily influenced (to use a polite term) rising interest rates pose several problems:

  1. In the aggregate most entities in the United States are heavily indebted, starting with individuals and families all the way to companies, State Governments and the Federal Government. Most States and the Federal government spend much more than they take in via taxes. The only way to make up the difference is to borrow the money by issuing debt. With interest rates rising, individuals, companies and governments have to pay more to borrow money. So these entities will either need to cut back on spending, or the amount of debt they accrue with increase.
  2. A lot of the elements of the US economy are accustomed to cheap money. There has been a large boom in housing demand due in part to people wanting to live in a nicer place since their ability to spend time outside the home has been very limited, combined with low interest rates that make it less expensive to borrow money to buy a house. The mortgage industry and real estate industry operate within the context of these low rates. If rates rise, that will put downward pressure on housing demand, and on the margin, people will not be able to service a mortgage at the higher interest rates.
  3. Stocks, particularly growth stocks in the technology sector have gone up a lot due to low interest rates. There are a variety of reasons for this. Low interest rates also mean it is inexpensive to borrow money to buy stocks with. Margin trading has also gone mainstream thanks to brokers like Robinhood. Higher interest rates means people can’t borrow as much money to buy stocks and all else equal this would put downward pressure on stock prices.
  4. With interest rates rising, bonds are more attractive. With rates effectively at zero nominally and zero or negative in real terms, people reach out along the risk curve. People who would be in government issued bonds might look to corporate bonds, which are considered riskier but pay a higher interest rate, those in corporate bonds might look to stocks, etc. With rising interest rates, if bonds do start paying a decent return (as judged by the investor) some folks on the margin will rotate money back into bonds.

I turn to CNBC to get a sense of what the mainstream, accepted narrative is. The narrative from folks over at CNBC is that the market is concerned about inflation, and so people are selling bonds to buy other assets and effectively demanding a higher rate of return in exchange for loaning the government money. There is also a theme that is repeated that rising rates are bad for the more speculative growth technology stocks.

What Impact Could Rising Rates have on Stocks?

I’m comparing certain periods of rising yields (using the 10-year to represent yields) and the ETF QQQ to represent stocks. QQQ is the 100 largest non-financial stocks in the NASDAQ. These are the stocks that CNBC wisdom would indicate would be most impacted by rising rates.

The big “dot-com” crash according to me, can be summarized thusly: the bubble was fueled by artificially low interest (courtesy of Allan Greenspan’s Federal Reserve), “investors” used cheap money to speculate on internet technology stocks with little or no earnings. When the Fed then tried to raise rates, the low interest rate “air” that was blowing the bubble was limited, causing the bubble to pop and stocks to crash.

The chart below shows the “QQQs” rising as interest rates fell. The Fed stopped cutting rates in September of 1998. The QQQs continued to rise, even as interest rates rose. But then technology stocks peaked in March of 2000 and then proceeded to crash 43% from this peak, until bottoming out in September of 2002. In order to get the “Dot-Com” crash to stop, the Fed had to lower interest rates even further.

Fast forward, the Fed then tried raising rates again, albeit very slowly, and in 2007-2008 the housing market crashed and the Fed had to cut rates.

There hadn’t been a major crash since 2008, up until the March 2019 government lockdowns shut down much of the economy throughout the world. The yield on the 10 year note has not gotten back above 4.174% since the housing bubble popped.

The lowest rates have gotten since March of 1997 is 0.398%, which happened in March of 2020. Rates have since risen to their current level of 1.732%. As the talking heads will point out, these are still historically low rates. That is true.

But amount of debt in the system has never been this high. In 2000 when the 10 year note yielded 6.5% the US had a debt to GDP ratio of 58.7% and the national debt was “just” $5.7 trillion. US National debt is now over $28 trillion and the debt to GDP is now over 129%.

Can the US afford to pay 6.5% on 10 year debt?

The other factor is the pace at which rates have risen. In one year the 10-year note yield has gone from a low of 0.398% to 1.732%, that is a 335% increase in 365 days.

In the lead up to the dot com crash, the 10 year yield went from 4.4% in September of 1998 up to 6.82% in August of 2000. That is a 55% increase over 700 days.

In the lead up to the housing bubble crash, the 10 year went from 3.29% in May of 2003 to 5.25% in June of 2006. That is a 59% increase over 1127 days.

Does rapid pace of this relative increase matter?

If the past is any indication the impact isn’t going to be immediate. In the past two major financial crashes, interest rates were already dropping again before the peak in the QQQs. Rates peaked in January of 2000 but stocks didn’t start selling off until August of 2000. In the housing bubble, rates peaked June of 2006 and the QQQs didn’t start selling off until October of 2007. You can see the delay visually in the chart below.

I certainly don’t know if rising rates will cause a stock market correction. Perhaps this time is different. If I could time the markets I would be much richer than I am. But rising rates are something to keep an eye on and in the past they have preceded stock market selloffs.

It does seem likely that the Federal Reserve will never be able to normalize interest rates. There have been periods of rising rates, but the clear trend is downward. The 10-year came close to zero in July of 2020. In the next crisis, rates will probably have to go negative.

Will anyone besides the US Federal Reserve want to loan the US Government money for 10 years at a negative nominal rate (and who knows how negative real rate)?

Gold Loses It’s Luster

Gold Loses It’s Luster

Gold isn’t supposed to tarnish but it has certainly lost its luster in my eyes so far in 2021. I have determined that for me, having 10-20% of my liquid net worth in precious metals makes sense as a protection against dollar debasement. Right now we’re in the kind of environment in which I would expect gold to shine (that should be it for the gold puns in this article.).

However, gold has not fared well so far in 2021.

What kind of environment am I writing about? Rising interest rates and helicopter money. Interest rates, while still historically low, have been rising. There has also been “helicopter” money where the treasury is directly sending people checks.

The Economic Environment

The latest round of these “stimmy bucks” should be coming soon, as President Biden is expected to sign a $1.9 trillion bill, which among many other things includes a $360 billion bailout of state, local and territorial governments and $1,400 check to anyone making $75,000 or less.

The blue team currently controls taxes and spending in the United States. While the reds are spendthrifts in their own right, and these stimmy checks were initiated under Trump, the blue team is worse. I’m not aware of a party which practices fiscal discipline in the United States. I expect this to be the first of many trillion dollar spending bills passed during the Harris-Biden Administration.

I understand that if the government is going to make it illegal for a lot of people to work and a lot of business to operate that creates problems, such as unemployment, less available goods and services and a lack of economic resources for individuals and families struggling to make ends meet. So this spending bill is no doubt an attempt to try to fix the some of the problems created by the lockdowns.

Whether these lockdowns were necessary to prevent people from dying from the Wuhan Coronavirus frequently referred to as COVID-19 should be debatable. However, thanks to censorship we all just have to click our heals and accept that without lockdowns the bodies would have piled up in the streets, hospitals would be overwhelmed and furthermore, that the increase in deaths due to undiagnosed cancer, suicide, etc., simply don’t exist or don’t matter. But I digress.

In an environment in which it has been illegal for people to show up to work to produce goods and services, and which the government is sending people checks, you expect rising prices. Prices have been rising. We’ll ignore the CPI, which seems to be designed to not measure rising prices. Lumber is up, oil is up, many commodities are up.

Gold is Not Rising

Even though many commodities are up, gold and silver are not up. Why is that?

Gold Price Action over the last Ten Years

After making new highs in the wake of the 2008-2009 financial crisis, Gold had been in a bear market from September 2012 through November 2015, where it made a low of $1,045. It pretty much traded sideways and slightly up for the next four years, until 2019, when gold rocketed up, finally making that new high in August of 2020, reaching $2,089 per ounce. It then proceeded to sell off and is currently trading around $1,721. I think $1,800 was an important price level, but the yellow metal zipped right through it.

There does seem to be some support around $1,700 but it doesn’t look super strong. I’m definitely biased to the upside, but my guess is gold bounces between $1,700-$1,800 unless and until the Fed does something to manipulate interest rates back down. Why would the Fed do that? An economic recession or a stock market selloff.

In February of 2020, the S&P 500 was trading around $3,350 or so. This was before the lockdowns and the panic. Now, after having shut down a lot of the global economy, after unemployment going upwards, the stock market has recovered, but are things better than they were in February of 2020? The stock market thinks so. The S&P 500 has made a new high of roughly $3,950.

I would think that if interest rates continue to rise there will be a significant correction in the stock market. The Fed would then step in and do what it can to lower interest rates back down which would prop up stocks. So far the market had shrugged off rising rates, however.

Why Hasn’t Gold Performed?

There are three main reasons. Reason #1 why gold hasn’t performed: rising interest rates. If bonds are yielding nothing, then it is easier for gold (which also yields nothing) to compete.

This is supported by the chart below. The 10 year treasury yield is in blue. You can see in late July, the yield on the 10 year bottomed and then started rising. At that same time gold peaked and then began to sell off. That inverse correlation looks very tight to me.

Gold has been a safe haven alternative to bonds in a low interest rate environment. Now that there is some yield to be had with treasuries, perhaps gold investors are concerned that zero yield gold will be replaced paltry (but at least nominally positive) yielding US debt.

Reason #2, which is conjecture on my part, is the stock market continues to rise. If there is real economic growth I would expect stocks to outperform gold long term. Gold is a safe haven asset outside the banking system. It does well when there is economic uncertainty, when a currency is in doubt.

Stocks have not sold off despite rising interest rates. As a result there isn’t a pressing need for a safe haven asset and money flows out of it. There was some volatility in the fall of 2020, but for the most part stocks have continued to go upwards. So while rising rates seems to have scared gold investors, it doesn’t seem to have impacted equity investors much.

Reason #3 is cryptocurrencies, specifically Bitcoin, which currently has over a 61% dominance in the cryptocurrency space. Some corporations are now deciding to put some of their money into BTC, and this institutional investment is doubtlessly driving the price up, and some people who are concerned about dollar debasement are probably deciding to go with so-called “digital gold” rather than real gold. You know it is bad when Peter Schiff’s son is liquidating his silver stocks and going 100% into Bitcoin.

From a transactional perspective it is less expensive to buy Bitcoin through an exchange like Coinbase, than it is to buy and ship gold from a bullion dealer. Some people are doubtlessly taking their stimulus checks and using it to buy Bitcoin.

Bitcoin Over Gold?

I won’t bother charting gold next to Bitcoin because Bitcoin has gone up so much that you would hardly even see gold on the chart.

I’ve never had enough confidence in Bitcoin to put a lot of money into it, and as a result have missed out on a lot of gains. The first mover advantage and name recognition seem to be enough to carry Bitcoin despite the existence of other coins that have superior characteristics, such as anonymity, higher and faster transaction throughput and lower transaction costs.

I’ve bought and sold Bitcoin over the years dating back to 2011 or 2012 and I still own some Bitcoin and EOS. Of course if I knew the price of BTC in 2021 was approaching $60,000 I would have bought and held onto more.

Despite the continued price rise to the moon and beyond, I personally have a lot more confidence that gold will be worth something 20 years as compared to Bitcoin which I have less confidence will be worth anything 20 years from now.

The two mains risks to Bitcoin are 1) The widespread adoption of a better alternative to Bitcoin 2) Interference from the Chinese Communist Party.

But, as I’ve written about countless times before, you can own both, it doesn’t have to be either or.

In the meantime I’ll continue to hold onto my gold and silver as a part of my overall asset allocation.

Can Government Kill Bitcoin?

Can Government Kill Bitcoin?

Some people who are anti-bitcoin will argue that the government will shut down bitcoin. Other pro-Bitcoin folks argue that is impossible. Of course these arguments could (and have been) made in a more subtle fashion, but those are the two camps when painted in broad strokes.

Governments Could Pass Legislation Making Bitcoin Illegal

The governments could easily pass legislation to make owning and mining Bitcoin illegal.

The US government has made basic things like alcohol and gold illegal in the past. Drugs like marijuana are still illegal at the Federal level in the US. So the US government has made various things it doesn’t like illegal in the past.

Making highly demanded products illegal doesn’t eliminate them. The black market steps in to supply the demand.

The war on drugs has been a colossal failure. Despite being illegal people with the limited resources and influence of your average high school student can still get marijuana. People in prison can and do still get illegal drugs. If the government can’t keep drugs out of prisons they will never keep them out of the country.

Even the most ardent statist would probably admit that alcohol prohibition was unsuccessful.

I’m not actually certain how successful the banning of gold was as a result of President FDR’s tyrannical Executive Order 6102, which attempted “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates”. It would be hard to judge because it would require people coming forward and admitting they violated an executive order for over 35 years. But I suspect there was significant non-compliance.

So prohibition of various things hasn’t worked well in the past. As long as there is demand for something a certain percentage of people who demand it will find a way to get it.

Despite the questionable efficacy of legislation governments certainly could make Bitcoin illegal. But would they?

The US Government will go after BTC if it is deemed a threat to the Dollar

The United States government could certainly pass legislation to make Bitcoin illegal. But I think they would only do this if BTC was viewed as a serious threat to the dollar.

The US government has (according to some) invaded countries and destroyed them for planning go off the petro-dollar and adopt a gold backed currency.

The ability of the US government to borrow in dollars and then create new deposits with which to pay back those dollars is a huge benefit and source of power. This is enabled (without rampant rising prices) because the US dollar is used for trade throughout the world and is held by foreign entities and governments as a reserve currency.

Bitcoin isn’t really a threat to the dollar right now. Sending BTC is slow, expensive, and Bitcoin can only handle about 20,000 transactions per hour. Unless this changes I don’t think Bitcoin will ever be used as money. If trade starts to happen in Bitcoin or oil begins to be priced in Bitcoin then the US government will likely view Bitcoin as a threat.

But right now Bitcoin has several advantages for the government. First, it is highly traceable since all Bitcoin transactions are public. I’m sure tying a person to a Bitcoin address is difficult but it can and has been done. Secondly, the meteoric rise in price and volume of trading means lots of taxable transactions and revenue for the IRS.

But if Bitcoin was a serious threat to the dollar the US government would try to stop it. The first step might be taxing and regulating it significantly. The United States is in the early stages of this first step. The next step might be making it illegal. A final step would be attacking it directly.

But making goods or actions illegal doesn’t make them go away, it just drives that activity underground. That doesn’t mean that government edicts banning something don’t have implications or impacts.

What might be the impacts of making cryptocurrencies like Bitcoin illegal?

The Impacts of Illegal Bitcoin

US Based Exchanges Would Disappear

Coinbase.com is the largest US-based cryptocurrency exchange. It would no longer exist or it would be forced to relocate to a jurisdiction where Bitcoin was legal and they would likely ban and block US customers. Current assets could be seized or forced to be turned over to the government.

Onramps and Offramps would be Reduced

There is a need for onramps and offramps between Bitcoin, government issued currency and real goods and services. Illegal Bitcoin would make it harder to convert Bitcoin and other cryptocurrencies from fiat and vice versa. Die hard Bitcoin enthusiasts might dream of a world in which transactions are conducted in Bitcoin and government fiat is not involved, but based on the current Bitcoin protocol that isn’t possible.

Additional technology like wrapped Bitcoin, which does exist, would be needed to make Bitcoin viable as money. However, this erodes some of the decentralized benefits of Bitcoin, as it requires a trusted custodian. But I digress.

Banks would refuse transfer fiat to known cryptocurrency exchanges. You wouldn’t be able to link your bank account to Coinbase for example. You wouldn’t be able to easily sell cryptocurrencies and transfer the proceeds back into your bank.

Apple and Google would ban all cryptocurrency related apps on their stores.

In order to get Bitcoin you would need to mine it, or find someone who already holds Bitcoin willing to exchange it for something you have. So there would need to be “back alley” exchanges. If one of these deals were to go south, there would be no legal recourse. Of course if you’re exchanging Bitcoin for goods and services with a friend or relative it might work out just fine.

The free market could step in to provide escrow services and some of the illegal exchanges might be trustworthy. Doubtless there would be more sketchy “pirate” exchanges but those might be the target of denial of service attacks conducted by governments. Trading on a “pirate” exchange would require trust in people willing to break the law. The number of exchanges that disappear with client funds or get hacked would likely go up.

Assembly, importing, selling and possession of Bitcoin ASIC Hardware would be Illegal

You can’t successfully mine bitcoin using a basic PC anymore. You also can’t successfully mine bitcoin using even a computer equipped with advanced graphics cards. Mining bitcoin requires ASIC (Application-specific integrated circuit) hardware and a lot of electricity. Owning or possessing this hardware would be made illegal.

People suspected of mining Bitcoins could also have their power usage monitored, similar to how law enforcement will look at the electricity consumption and temperature of houses to try to determine if marijuana is being grown indoors.

I’m sure this would not stop some people from illegally mining Bitcoin, but I do believe it would reduce the amount of miners in the US.

Larger Corporations Would Not Own Bitcoin

Tesla announced they purchased $1.5 Billion in Bitcoin back in January of 2021. This would be illegal and so a company like Tesla would almost certainly not do it. Companies found in violation would be fined, have the Bitcoins seized or would be prevented from doing business in the United States, one of the largest economies in the world. The US could also bully non-US companies into shunning bitcoin like they do with foreign companies who try to transact with countries the US has sanctioned.

ISPs Might be Required to Block Access to Bitcoin related Sites

This would be an inconvenience and would only stop more casual users. VPNs could be used to get around such censorship and so I don’t think effort to stop Bitcoin would be very effective. However, it would make it somewhat more difficult or slower to connect to nodes, or transact in Bitcoin. Barriers to entry, particularly for less tech savvy users, would be negative for Bitcoin.

Bitcoin addresses would be tracked

I know governments already track Bitcoin wallet addresses used or suspected of being used for illegal activity. Bitcoin is pseudonymous and somewhat decentralized but it isn’t anonymous. All Bitcoin transactions are available for anyone to view.

Government agencies in charge of enforcing a Bitcoin ban would no doubt spend a lot of time tracing large Bitcoin transactions on the network and attempting to determine who controls those addresses.

This is a complicated effort but given enough time and resources it could be done. This would be a challenging effort no doubt and the Bitcoin community would likely try to do coin mixing or work to make the network anonymous.

So those are some possible results I see unfolding if Bitcoin was made illegal. But just making Bitcoin illegal is only a phase 2 approach. Government could go even further and attempt to attack Bitcoin directly.

The Impacts of a Bitcoin Attack

A 51% Attack

If an entity or group controls 51% or more of the mining/hashing power of a network like Bitcoin they could prevent new transactions from taking place or being confirmed, they could mine empty blocks in which no transactions were processed or they could double spend their Bitcoins.

The US Government is willing to spend tens of billions of dollars on the war on drugs each year. They are definitely willing to spend more than that to defend US dollar hegemony if Bitcoin was a threat.

The NSA could build bitcoin mining data centers and launch a 51% attack on the Bitcoin network and they would be willing to spend Billions of dollars to do so. This would be challenging as it would require ASIC hardware and a lot of electricity.

According to this website an attack would cost $716,072 per hour. This would be about $6.2 billion per year.

The US government spent $29.4 billion on the war on drugs in 2018, so $6.2 billion is chump change. The attack would not need to be done for an entire year. They could do the attack for a few months, or a few hours each day, just to disrupt the network and cause chaos and tank the price.

A 51% Attack by the Chinese Communist Party (CCP)

Would the United States devote the money to launching a 51% attack on Bitcoin? I think so if it was a threat to the dollar. But I don’t know how likely that is.

A 51% attack on the Bitcoin network is perhaps most likely to come from the Chinese Communist Party (CCP). The hashing power and cheap electricity are already in China: 65% of Global Bitcoin Hashrate is Concentrated in China. Even if that number overestimates Chinese hashing power by 14% it is sill enough. An October 2018 study wrote, “As of June 2018, over 80% of Bitcoin mining is performed by six mining pools, and five of those six pools are managed by individuals or organizations located in China.”

A more recent estimate predicts 65% of the Bitcoin Hashrate is concentrated in China. By my own determination of country designation, in conjunction with data from https://www.blockchain.com/charts/pools, Chinese affiliated mining pools account for at least 55% but perhaps up to 62.5% of the last 587 blocks mined (as of 28 February 2021).

That doesn’t sound very decentralized.

The Chinese Communist Party (CCP) could infiltrate the Bitcoin mining organizations in their country in a more clandestine manner or they could seize the Bitcoin hashing power directly. They wouldn’t need to build a new data center or account for new electricity needs, the hashing power and electricity generation is already there.

Electricity in China is very inexpensive compared to nearly all the rest of the world.

Source: https://www.statista.com/statistics/263492/electricity-prices-in-selected-countries/

The Chinese Communist Party has no problem using cheap, dirty coal to generate 68% of its electricity. As an aside China accounts for 30% of global CO2 emissions. However, some of the power also comes from the abundant and inexpensive hydroelectric power found in certain Chinese regions.

What would motivate the CCP to attack Bitcoin? If it was a threat to their power in some way. Perhaps if it was being used to circumvent their taxes, regulations, capital controls or is just viewed as a threat to their centralized communist ideology. If enough organizations in the west held Bitcoin it might behoove the CCP to destabilize BTC to cause economic disruption for their enemies.

I’m sure the Bitcoin community would come together to try to work around this attack, but it could be highly disruptive. Such an attack doesn’t need to destroy the Bitcoin network forever, it just needs to shake the confidence of enough Bitcoin holders to get them to sell and dissuade enough would be Bitcoin buyers and thus tank the price.

I Don’t think the Government Can Kill Bitcoin But It Can Significantly Maim It

I don’t see much motivation for the US government to make Bitcoin illegal as it isn’t a threat to the dollar. But if it did and they made BTC illegal it would probably reduce the number Bitcoin users by taking away onramps and offramps and prosecuting people found in violation of the law.

Like the war on drugs or prohibition of alcohol I don’t think the government can kill bitcoin just by making it illegal. Through an attack government could cripple Bitcoin and leave it in a semi-comatose state in an out of the way convalescent facility where only a few devoted friends come to visit.

The CCP could be in the best position to successfully attack bitcoin due to their inexpensive electricity and that the majority of hashing power already existing within their jurisdiction.

At a minimum such an attack on Bitcoin would surely result in a price collapse. Would Bitcoin be able to recover? I don’t know. Bitcoin has survived various other incidents and selloffs only to make new highs. So far the HODLers have been well rewarded. But understanding the risks posed by a high concentration of Bitcoin miners in China is important for those who own Bitcoin.

Bitcoin Will Never Be Money

Gold isn’t money, silver isn’t money and I don’t think Bitcoin will ever be used as money. To be fair I don’t think gold and silver will ever be money again–not in a digital world.

What is money? “Money is a commonly used medium of exchange. People wishing to achieve their ends often have to trade. They can exchange their goods directly, if they have matching preferences and suitable goods, or indirectly, with the help of another good, the medium of exchange.”

Source: https://wiki.mises.org/wiki/Money

They key word in the above definition is commonly used.

Bitcoin is very expensive to transfer and it is slow. For large sums of money it is comparable to a wire transfer. But for day to day transactions Bitcoin simply doesn’t deliver.

“The standard set by the Bitcoin community is six transfer confirmations before it is complete. Each confirmation can be expected to take about 10 minutes, thus getting an average of one transaction per hour.”

Source: https://www.buybitcoinworldwide.com/tx-time/

The fees are also not cheap. The cost is based on a variety of factors but according to this calculator a transaction would cost between $5-10 at the time of this writing.

Source: https://www.buybitcoinworldwide.com/fee-calculator/

That’s a bargain if you want to transfer large amounts (say $20,000 or more) of value outside the banking system but not great if you’re buying a coffee.

On a volume perspective Bitcoin is somewhat archaic. It can process about 20,000 transactions per hour. Compare this to Visa, which can process 65,000 transactions per second.

Source: https://cryptonews.com/exclusives/how-much-adoption-can-bitcoin-handle-right-now-3924.htm

So unless Bitcoin becomes transactions become dramatically faster, cost less, and allow for more volume. It is difficult to see how Bitcoin would ever be used as money.

Three Reasons Why eBay Managed Payments is No Good

Three Reasons Why eBay Managed Payments is No Good

I never would have thought that eBay could make PayPal look good!

PayPal was founded in 1998 as “Confinity,” went public in 2002, was acquired by eBay later that year, but then spun off in 2015.

Starting in late 2020, eBay began issuing propaganda that their new managed payments system would save sellers money and simplify the selling process. I’ve been selling on eBay for a long time. So when they rollout a change like this it impacts me.

The truth is eBay Managed Payments is no good. The result is higher fees (which are essentially paid by the seller instantly) and slower payouts. I should clarify it is no good for sellers. I’m sure it’s great for eBay’s bottom line.

1) Sellers Pay More

The fees have increased in most situations. The irony is that eBay spouted what I believe are untruths about how fees would go down. In some specific cases the fees are lower so perhaps they are clinging to that as justification for their assertions.

Let’s look at two examples with the first using PayPal. Then the same sale transacted through eBay’s Managed Payments.

eBay with PayPal

Let’s say there is an item sold for $191. Buyer pays shipping. They also have to pay 8% sales taxes to their state.

Shipping is $9.45 via the US Postal Service (USPS). eBay charges a 10% “final value fee” on the sale price plus any shipping charged. 10% of $200.45 is $20.05.

It costs the seller probably a little less than that just for the shipping to the USPS because eBay does provide a discount, but when you include packaging it costs at least what the seller paid, if not a little more.

Finally, PayPal charges 2.9% plus $0.30, so they get $6.58.

Note: In this case eBay charges 10% on the final value fee plus the shipping but the 10% was NOT charged against the taxes. PayPal charges the 2.9% plus $0.30 on the item, shipping, plus the taxes.

So you can see that eBay gets $20.05, PayPal gets $6.58 and the seller gets $164.38. Now I didn’t include the cost of the item for the seller. I also didn’t include the costs for eBay or PayPal (since I don’t know them).

So these aren’t profits. In order to calculate profits you’d need to know host much the item costs the seller and how much eBay and PayPal have to spend per transaction.

eBay with eBay Managed Payments

Let’s look at the same sale, only conducted with eBay Managed Payments. The Final Value fee is increased to 12.35% plus $0.30 per transaction. However, eBay now charges this on the sale price, shipping AND the taxes paid by the buyer.

This is interesting because the seller has to pay a fee for eBay to collect the taxes sent to the state. Is this worth it to have eBay handle sales tax collection? Definitely not for smaller sellers who by law in most state aren’t required to collect sales taxes if their revenue or transaction count is below a certain threshold. (Disclaimer: I’m attorney and this is not tax or legal advice).

So the eBay fees jump up to $27.04. The PayPal fee goes away since they aren’t involved. The seller gets $163.96.

So now eBay’s fees have increased 34.86%! Not bad for eBay! PayPal’s fees have dropped 100%, and the seller gets about 0.25% less. Now 0.25% less isn’t a lot. But it is less.

This is NOT what eBay was communicating to sellers. Here is an email I received from eBay:

Perhaps “most sellers” only sell in states that don’t collect sales taxes? It doesn’t make any sense to me.

In some categories, the fee is less than 12.35%. But in some categories it is more. In “Most categories” the fee is 12.35%.

Source: https://www.ebay.com/help/selling/fees-credits-invoices/selling-fees?id=4822

Do eBay Managed Payments result in the seller paying less?

If sales taxes aren’t collected then yes.

But that doesn’t happen often. eBay collects sales taxes in 42 states plus the District of Columbia and Puerto Rico. So unless the buyer is in Alaska, Delaware, Florida, Kansas, Missouri, Montana, New Hampshire or Oregon, Managed Payments costs sellers more.

But this is a win for eBay since they collect much more in fees.

2) Seller Payouts are Slow

With PayPal, payments were basically instantaneous.

Now payments are “processed” for 2 days before being paid out to the seller’s bank account.

“We will initiate payouts within two business days of payment confirmation.” – eBay

Depending on how quick or slow your bank is, it could take 3-5 days to get paid. I’m sure eBay could initiate sending the payments to the bank instantly if they wanted to (with payments only delayed by the bank). Managed Payments is basically going back to 1997 technology payment processing speed.

When the buyer pays I’m confident that it goes to eBay at the same speed it did before. The delay is only to the seller. But by having access to the money longer this is a win for eBay.

3) Seller Fees are Instant

While the payouts are slower for sellers the fees are are paid instantly. Prior to Managed Payments, eBay collected fees on a monthly basis. So seller had a month to come up with the fees. Now eBay gets the fees instantly, as soon as the buyer pays.

So the payouts are slower and the fees are instant.

eBay’s Managed Payments is No Good

Often higher fees, slower payouts and instant fees means that eBay’s Managed Payments leaves sellers worse off. But this is definitely a win for eBay since they will be able to collect more fees faster.

But eBay is a Private Company and if you Don’t Like it you Can Leave!

Very true! I’m not saying eBay did anything illegal, I’m not saying they did something they don’t have a right to do. But that doesn’t change the fact that eBay Managed Payments has made selling on eBay worse for sellers like me than it was before.

However, it seems very likely to me that when eBay wrote “Most sellers will pay the same or less than before” they were being deceptive and unethical. I don’t understand how eBay’s statement can be true.

I have chosen to continue to sell on eBay for now because the fees aren’t that much higher and eBay still has a lot of buyers that I haven’t found a better way to get access to. But I hope that the free market will step in and provide some better alternatives to eBay.