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Puerto Rico Shows the Importance of Cash

Puerto Rico Shows the Importance of Cash

“With Widespread Power Failures, Puerto Rico is Cash Only” reads the title of a recent New York Times article in the wake of Hurricane Maria. This tragedy in the “Rich Port” is a sad reminder of the importance of keeping some emergency funds in physical cash.

The horrible devastation in this Caribbean territory of the Unites States is another reminder why keeping a few months worth of expenses in cash is a great idea.

It’s also a reminder to the anti-cash types that even in parts of the United States, power restoration can take weeks or months and a society without some cash is economically more vulnerable. This isn’t some abstract problem. It has a face, the face of people waiting in line, not being sure if they’ll be able to buy food or gas because they can’t access their bank account or use their debit card.

If there is a power outage I’m not going to want to spend my gold (the average cashier at the quick mart would probably stare at me dumbly even if I tried), I’m not going to be able to use a credit card, Goldmoney or bitcoin—I need cash.

If you think you’re going to be able to wait for a disaster and then go to an ATM at the same time as everyone else then at best you’re going to be faced with a long line. At worst the ATM won’t work or will be out of cash. Banks will have long lines and they could start imposing withdrawal limits to ration the cash they have available.

This isn’t my theory or some doomsday scenario, this is what happened (and is still happening as I write this) in Puerto Rico.

If people held a few months of expenses in cash then they would be in a better position to buy food, fuel, and start repairing their homes and businesses.

Of Course There are Downsides to Cash

I’m as bearish on US dollars and fiat money as anyone. So of course holding cash has downsides: Here are the main ones:

1) It loses value

The dollar has lost most of it’s value since 1913. So the wealth you have in cash will be inflated away as central banks inflate the money supply.

2) Theft

Carrying around a lot of cash is generally considered risky and not without reason. Looting and a general increase in crime is an unfortunate reality in the wake of disasters. There is also the problem of civil asset forfeiture. In the United States, the “freest country in the world,” if members of the law enforcement community suspect you of a crime, they have the means to simply take your money and/or other property and it will be up to you to sue the government and prove you’re not guilty and get your property back.

Civil asset forfeiture in the US is a black and white violation of the 4th amendment, but it happens all across the US and in 2014 more property was taken from US citizens by members of the law enforcement community than was taken by burglars. But I digress.

These Risks can be Mitigated

Think of cash as a form of insurance against: 1) Loss of electrical power 2) Capital controls 3) Negative interest rates

And like all insurance it comes at a cost. The cost of holding cash is inflation and the opportunity to put the cash to work in other investments.

I already own various hedges against inflation, such as gold, silver, stocks, and even cryptocurrency, albeit I remain very cautious of this last one. So the fact that a few months worth of expenses in cash losing value is of little concern.

The risk of theft can be mitigated as well:

1) Keep most of your cash in a safe or hidden place

2) Keep it in various locations around your home and perhaps at other locations as well

3) Don’t carry all of your cash at any one time

4) Dress nicely and be respectful to members of the law enforcement community

If two months worth of expenses is $2,000 I’m not saying carry around two grand. Maybe you keep $900 in a safe, $500 hidden someplace else in your home, and $500 with a trusted family member or close friend and a $100 in your purse or wallet. When you go to the store or gas station only take the cash with you that you need. That way if someone uses force to take your money, they won’t get all of it.

The Upsides Makes Holding Some Cash the Smart Move

1) I can be my own ATM. I’m not reliant on a bank or ATM allowing me to withdraw my money. I hold my money. This is vital when everyone is trying to withdraw cash at the same time.

2) If there is a power outage or communication disruption I can still buy food and fuel. Whether it is an EMP, ice storm, hurricane, brownout or cyber-attack, I can still buy the basics of life until things settle down. While fiat money is weak over the long term, in a disaster cash is still king.

Holding a few months of expenses in cash is a great idea. It can also double as an emergency fund in case you have an emergency repair to your car or home, medical expenses, etc.

Smaller denomination bills make more sense. Acquire $10s and $20s not $50s and $100s. Stores are generally more suspicious of larger denomination bills.

Not only that but it allows you to provide for yourself and help others. If I don’t have to go to the ATM or bank to withdraw cash that means there is one less person in line and anyone who would have been behind me in line can get cash faster. If 20-30% of people or more are prepared for a disaster it means there are much fewer people that need to be helped and there will be more resources to help a smaller number of people who need help. Maybe you’ll be able to share some of your cash with a neighbor and help them out.

Cash isn’t an investment and yes it loses value thanks to central banks, but holding a month or two’s worth of expenses in cash is a smart idea as part of a larger wealth and financial protection strategy. My thoughts and prayers are certainly with the people of Puerto Rico and it is a sad reminder of the importance of cash.

Creating Value

The vast majority of money I’ve made has been working for someone else. Why were they willing to pay me? Because I created value for them. The work I did for my employer allowed the employer to make more money than would have otherwise been possible–even after paying for my labor.

That is really the key to wealth: creating value for others.

The vast majority of wealthy people have helped lots and lots of people. Sure there are exceptions, but most people who have wealth have created value in proportion to the money they’ve made.

So if you want to grow wealth, ask “How can I help people?” If you provide a product or service that helps people and it is available to them at an attractive price people will gladly pay you money for it.

I appreciate that can be hard to do.

But there are people and organizations (businesses) that have already figured out a product or service that people want and are willing to pay money for and they often hire others to help them run their business. That is of course the way that most people make money–by working for someone else. That is how I’ve made the majority of my money, by working as an employee.

But the value creation mindset is still there. I think that mindset helps me to be a valued employee. It prompts me to ask: What knowledge, skills and abilities to I need in order to help this company? How can I help make this business more successful? How can I help this business be more efficient and more profitable?

By creating value at a company and helping make the business more profitable I know that I’ll be rewarded as well. Does it always work that way? No. But it has worked that way for me more often than not.

I enjoy investing. Investing is a way to passively grow one’s wealth over the long term. But I need to make money to have money to invest.

The way to make money in business is by helping people. It’s by creating value. Wether you’re starting or running your own business or working for someone else creating value is the key to growing wealth.

What I Dislike About Cryptocurrencies

What I Dislike About Cryptocurrencies

There is a lot I like about cryptocurrencies. Many cryptocurrencies seek to make money decentralised and wrest control from the central banks that have a history of devaluation and abuse.

But there are several things I dislike about cryptocurrencies. I see several problems with them as a long-term store of value.

“What is a Cryptocurrency Anyway?”

Bitcoin is the largest cryptocurrency but there are hundreds of others as well. If you’re not familiar with Bitcoin I provide some background here: “What is Bitcoin?

What I Dislike About Cryptocurrencies

Cryptocurrencies are better than government controlled fiat. But I don’t accept that being better than the disaster that is government fiat currency is good enough and I’m not going to pretend like cryptocurrencies solve all the problems of government controlled fiat money.

I’ve presented what I think are superior alternatives such as Goldmoney.

I touched on what I don’t like about cryptocurrencies in my gold versus bitcoin article but I wanted to dedicate an article solely to the elucidation of what I don’t like about cryptocurrencies.

My dislikes fall into three main categories.

1) They are centrally controlled

2) There are no natural limits on the quantity of cryptocurrencies

3) Cryptocurrencies have very low (or no) non-monetary use

Cryptocurrencies are Centrally Controlled

I am skeptical of the claim that cryptocurrencies like bitcoin are decentralised

The holdings of the cryptocurrencies are concentrated in the hands of the early adopters.

It is estimated that the mysterious creator(s) of Bitcoin, Satoshi Nakamoto, holds between 4-6% of all Bitcoin.

Source: http://www.businessinsider.com/satoshi-nakamoto-owns-one-million-bitcoin-700-price-2016-6

Vitalik Buterin owns a large number of Ether. Evan Duffield owns a large quantity of DASH.

Ripple intends to hold onto 50% of all Ripple cryptocurrency. There are similar situations for altcoins as well.

I think it is fine and good that early adopters and founders reap more reward for investing in a technology–my point is that cryptocurrencies are not actually as decentralised as cryptocurrency advocates would like you to believe.

This control isn’t limited to who holds the cryptocurrencies.

The control also extends to how the cryptocurrency technologies will function moving forward.

The Bitcoin Foundation, Bitcoin core developers and the largest miners control Bitcoin. The Ethereum Foundation and Vitalik Buterin control Ethereum.

People try to make arguments that cryptocurrencies aren’t centrally controlled and I’m not swayed by any of them.

At the end of the day cryptocurrencies are controlled by a small group of computer programmers.

What happens when cryptocurrencies actually behave in a decentralised manner? You get forks, like Ethereum Classic. Which brings me to my next point.

There are no natural limits on the quantity of cryptocurrencies

Like water in the desert, things that are both limited in supply and desirable tend to be valuable

I don’t have the knowledge or time to delve into the code of the Bitcoin algorithm but I accept on faith that because of how the bitcoin algorithm is written only 21 million Bitcoins will ever exist.

So in that way the quantity of Bitcoins are limited.

However, there is no limit to the number of “altcoins” or other cryptocurrencies that can be and are created.

There is Dash, Ethereum, Litecoin, Ripple, Monero and dozens of other altcoins you’ve never heard of. There are currently nearly 100 altcoins with a market cap over $20 million.

I’m all for competition and choice but when I’m investing in something as a long term store of value I want it to be limited in supply.

Furthermore, if the cryptocurrencies actually behave in a decentralised manner, you sometimes get hard forks.

Hard Forks

There is a cap on the maximum number of Ethereum that will ever be in circulation–but after a hack related to the “DAO” Ethereum forked and a new cryptocurrency was created called Ethereum Classic. This fork effectively doubled the number of Ethereum in existence.

Hard forks effectively result in double the number of units of that particular cryptocurrency

As a brief background, someone the “DAO” which was one of programs on the Ethereum network and stole a lot of Ether.

This caused an outcry, some people wanted to reverse that transaction so the thief wouldn’t get away with it. Some people didn’t want to reverse the transaction because it would mean Ethereum transactions weren’t irrevocable.

Ultimately a hard fork ensued and people who didn’t want to reverse the transaction got Ethereum Classic and those that followed the Ethereum Foundation and Vitalik Buterin remained on what is called Ethereum.

There is also talk of a fork in Bitcoin which would have a similar result: two different flavors of Bitcoin when before these was only one. In effect a doubling of the number of Bitcoins.

Cryptocurrencies have Very Low (or no) Non-Monetary use

I’m not going to flat out say that cryptocurrencies like Bitcoin have zero non-monetary use.

Although if you wanted to round down zero would be accurate.

Some people probably purchased Bitcoin as a political statement or way of saying that they didn’t want to be a part of a government controlled currency system. That is a non-monetary use.

But I think that use value is fairly low. Physical US dollars have non-monetary uses, like kindling or tacky wallpaper, but again that use value is very low and there are much better alternatives that accomplish the same thing.

Some people don’t think it matters that cryptocurrencies have little to no non-monetary use. For a time it probably doesn’t matter. People can subjectively value whatever they want. Otherwise you can’t explain why some works of modern “art” are sold for such high prices. But the question is will that subjective valuation be likely to hold?

Fiat currencies have little to no non-monetary use and how have they fared?

The value of Fiat currencies throughout history have eventually gone to zero. The fiat currencies that exist today did not exist 300 years ago.

The British pound Sterling, founded in 1694, is the oldest fiat currency in existence at 317 years. Most fiat currencies don’t last long.

Source: http://georgewashington2.blogspot.com/2011/08/average-life-expectancy-for-fiat.html

Gold has been valued for the past 3,000 years. What is the difference between gold and government issued fiat currencies? Gold has non-monetary use and non-monetary properties that have, for the past 3,000 years and up to this day, caused people to value it.

But I had better stop myself there rather than jump back into a gold versus bitcoin debate.

I don’t see how cryptocurrencies, that have very little non-monetary use, will fare better than government issued fiat over the long term.

Summing it Up

Some of the other shortcoming of cryptocurrencies are related to security and ease of use but I think those issues are sufficiently manageable.

I just don’t think the coins themselves are a good long-term store of value.

I choose to own both gold and cryptocurrency–I just choose to own more gold.

I also choose to partake in the Bitcoin market through USD margin funding on Bitfinex and arbitrage on BitBays, which can be done without any exposure to the underlying cryptocurrency itself.

BitBays has a proven track record of security and the USD arbitrage fund doesn’t involve any exposure to Bitcoins or crypto.

Just because there are things I don’t like about cryptocurrencies doesn’t mean I won’t use them and profit by them.

I own several flavors of cryptocurrency because I believe that they will be worth more in the future than what I paid for them. I also like to take advantage of the price differences on different exchanges. By investing in the BitBays USD arbitrage fund I make 12.95% per year in passive, liquid income.

I will be writing a future article entitled “Why I Like Cryptocurrencies” where I go into more detail about what I do like about cryptocurrencies.

What do you think of cryptocurrencies? Do you currently own any?

(29 July 2017: In a previous version of this article I claimed that cryptocurrencies are not scarce. I’ve updated the article with more precise language. At the time I first published this article there were over 100 cryptocurrencies with a market capitalization over $1 million, I’ve updated this number to nearly 100 cryptocurrencies with a market capitalization over $20 million.)

Powerful Wealth Lessons Concealed by Schools

Powerful Wealth Lessons Concealed by Schools

“We teach about how to drive in school, but not how to manage finances.” – Andy Williams

I didn’t learn much about personal finance or how to build wealth in school.

Even though I find art history, World War II, and the Pythagorean theorem interesting and important areas of study–I can think of few topics with more day to day relevance than personal finance.

But if it weren’t for two finance electives I took in college I wouldn’t have learned anything about personal finance in school.

There are powerful wealth lessons that schools could teach but for some reason do not.

Five Powerful Wealth Lessons School Didn’t Teach

1) I must Produce more than I consume to Build Wealth

I can’t say it better than Simon Black:

The Universal Law of Prosperity is very clear– in order to build wealth you have to produce more than you consume. – Simon Black

Source: https://www.sovereignman.com/trends/this-entire-system-is-rigged-against-your-prosperity-18760/

This basic concept isn’t taught in school and as a result we get polls like: “Two-thirds of Americans would have difficulty coming up with the money to cover a $1,000 emergency.”

Source: http://apnorc.org/news-media/Pages/News+Media/Poll-Two-thirds-of-US-would-struggle-to-cover-$1,000-crisis.aspx

The United States can also boast the following numbers:

debt

Source: https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

If you consume more than you produce, the only option is to go into debt, which is a sure way to become poor.

In school I never learned the powerful wealth lesson: I must Produce more than I consume to Build Wealth.

2) Money Loses Value Because of Central Banks

Marriner S. Eccles Federal Reserve Board Building by ctj71081 https://creativecommons.org/licenses/by-sa/2.0/

Marriner S. Eccles Federal Reserve Board Building by “ctj71081” https://creativecommons.org/licenses/by-sa/2.0/

I think most people KNOW that money loses value (or at least that things are getting more expensive each year), but for anyone who disagrees here are some facts:

  • In 1950 a new house cost $8,450 in 2016 the average is over $300,000 (3,450% increase)
  • In 1950 a gallon of gas was 18 cents in 2016 it is $2.40 (1,233% increase)
  • In 1950 the average cost of new car was $1,510.00 in 2016 it is $33,560 (2,122% increase)
  • In 1950 the average income per year was $3,210 in 2016 it is $55,000 (1,613% increase)

Source: http://fuelinsights.gasbuddy.com/content/docs/2016forecast.pdf
Source: www.thepeoplehistory.com/1950s.html
Source: www.deptofnumbers.com/income/us
Source: www.usatoday.com/story/money/cars/2015/05/04/new-car…price-3…/26690191/

Those are stats specific to the United States but I know you’d find similar statistics throughout the world.

Dollars (and other fiat currencies) are losing value. Incomes are not keeping up with the rising costs of homes and automobiles, the two major types of purchases many people will make.

Saving money in dollars is a sure way to get wiped out.

Money doesn’t lose value because of some mysterious force or greedy businesses, it loses value because of central banks. This is something I’m passionate about because it is simply robbery. Not only is price inflation robbery, but it most directly harms the poor. I’ve written about the Downfall of the US Dollar and What Causes Inflation.

In school I never learned the powerful wealth lesson: Money Loses Value Because of Central Banks.

3) I’m on my Own for Retirement

In over 18 years of education in US government schools I can’t recall ever learning about the failure of US government programs.

There are countless examples.

One is state public pensions. They are woefully underfunded. Alaska, California, and Illinois are some of the worst offenders when it comes to underfunded pensions.

However, all fifty of these United States plus the District of Columbia suffer from underfunded public pensions.

Source: http://www.zerohedge.com/news/2016-12-02/stanford-study-reveals-california-pensions-underfunded-1-trillion-or-93k-household

Two more in-progress failures are Social Security and Medicare. (To be fair, I did learn about the insolvency of these programs in FIN 232, my senior year of college.)Wealth Lessons

The Medicare Trustees’ report indicates the Medicare program is underfunded and revenue is less than expenditures.

Source: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html?redirect=/reportstrustfunds/

The Social Security Trustees’ report indicates that Social Security is underfunded as well.

Source: https://www.ssa.gov/oact/tr/

This isn’t some tin-foil hat conspiracy. Below is a direct quote (from 2015) from the Social Security and Medicare Boards of Trustees:

Social Security’s Disability Insurance (DI) Trust Fund now faces an urgent threat of reserve depletion, requiring prompt corrective action by lawmakers if sudden reductions or interruptions in benefit payments are to be avoided. Beyond DI, Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing.

Source: https://www.ssa.gov/oact/TRSUM/2015/index.html

I never learned about the importance of saving for retirement in school. I never learned about investing, IRAs, 401ks, pensions, or Health Savings Accounts. (Again, I did learn about these in FIN 232, my senior year of college.)

If you’re under 40 and you live in the US and you think you can count on Social Security and Medicare (or a public pension) I think you’ll be in for a rude surprise.

Social Security and Medicare are broken. Plain and simple. “But politician X will save these programs!” you might be tempted to think.

Here is another quote from the above report:

“Social Security and Medicare together accounted for 42 percent of Federal program expenditures in fiscal year 2014.”

This is the same Federal Government that is $20 trillion in debt. If the US Federal Government bails out Social Security and Medicare, who is going to bail out the Federal Government?

People need to make their own preparations!

In school I never learned the powerful wealth lesson: I’m on my Own for my Retirement.

4) College Isn’t Right for Everyone

Will this guy have to go $200,000 in debt to get a degree in British Literature?

Will this guy have to go $200,000 in debt to get a degree in British Literature?

How many times have you heard something to the effect of: “Study hard, go to college, get a good job and then retire at age 65.”?

That approach CAN work, but high school seniors need to be asking themselves, “does it make sense to go $150,000+ in debt for an art history degree?”

I took an art history class in college and I really enjoyed it. But if I knew how much I was paying for that class I would probably have done a lot better going to a museum or buying a few books.

If, for example, you can get a chemical engineering degree for $100,000 and are then able to make $70,000 per year right out of college then it starts to make more sense. But people need to start making those cost benefit and ROI calculations.

Young people need to stop assuming that college is a good idea. It depends on the cost of the education and how much that degree will allow you to earn once you graduate.

In school I never learned the powerful wealth lesson: College Isn’t Right for Everyone.

5) There is a Difference between Good Debt and Bad Debt

wealth lessonsThere is good debt and there is bad debt.

Taking out a $35,000 loan to buy a brand new car is very expensive. Maybe you’re making enough money that you can afford to treat yourself to a new car every 2-3 years and maybe leasing an automobile makes sense in that case.

But a good used car that is 5-6 years old makes a lot more financial sense particularly if you aren’t making a lot of money.

On the other hand, taking out a $200,000 loan to buy an income producing rental property could make a lot of sense.

Taking out a loan to buy new shoes or a car or other consumable items is bad debt.

Taking out a loan to buy an income producing asset is good debt.

In school I never learned the powerful wealth lesson: There is a Difference between Good Debt and Bad Debt.

I Learned a lot about Personal Finance outside of School

I learned a lot about personal finance from my parents, by reading, talking to experts, attending seminars and trial and error. In some ways it’s a good thing I didn’t learn about personal finance in school because I probably wouldn’t have learned as much and most likely would have been taught things that aren’t true that I would have had to unlearn.

The important takeaway is that financial education is critically important and that it’s up to YOU to make sure you learn what you need to know.

Gold versus Bitcoin

Gold versus Bitcoin

I favor gold over Bitcoin as a long-term store of value.  I do think that blockchain technology is here to stay for a long time. However, I question the long-term viability of Bitcoin.

But before I get into that I want to say that if someone loves Bitcoin and hates gold they are free to own Bitcoin and no one will force them to own a single gram of gold! The opposite is also true. You can also own some combination of both!

For me, I’ve chosen to own much more Gold than Bitcoin but I still own both.

I’ve written about how I buy bitcoin and also about bitcoin arbitrage. I’ve also written about owning physical gold outright and physical gold through Goldmoney.

I do think having a very small percentage of my assets in crypto currency is appropriate for me but I’m leery of having too much of my net worth in cryptocurrency.

So with that in mind I present gold versus Bitcoin. This is a comparison between the two as I think of it. What you value or find important will likely be different.

That is the great thing about free markets: there doesn’t have to be one answer that is forced on everyone.

What I like about Bitcoin

International Value Transfer

I think BTC beats everything else out there for international value transfer. I’ve done international wire transfers and domestic wire transfers in traditional government fiat currency and Bitcoin is faster, easier and cheaper than anything else I’ve used.

Bitcoin has Advantages over Fiat Money

Dollars (and other fiat money) are constantly being devalued and destroyed via fractional reserve banking and central bank debt monetization and money “printing”. The total number of Bitcoins that will ever exist is set by how the bitcoin algorithm is coded.

What I don’t like about Bitcoin

It is Centrally Controlled

A disillusioned insider I came in contact with has swayed me to the opinion that Bitcoin is not decentralised. The decisions about Bitcoin are made by the Bitcoin Foundation and a few of the larger miners.

Bitcoin evangelists will tout Bitcoin as being decentralised. I’m open to new arguments and evidence supporting that Bitcoin is in fact decentralised but as of now I see Bitcoin as being centrally controlled.

It’s Direct-Use Value is Very Low

Some people argue that there is direct-use value in Bitcoin. It can be used as an experiment, political statement, etc. Others argue that Bitcoin has no direct-use value.

gold-versus-bitcoinEven if Bitcoin is valued for direct use I think that value is very low. Dollars have some direct use value as well, for example kindling, tacky wallpaper, etc, but it is a fraction of the value dollars currently command in trade.

The reason I think this is a problem is because the direct-use value (aka non-monetary use value which is also sometimes called “intrinsic value”) provides a floor.

Government fiat currencies and Bitcoin have little (or zero) direct-use. So when these mediums of exchange fall out of favor, they can go to zero or near zero.

Bitcoin Could be Replaced by a Better Cryptocurrency

Bitcoin has some issues in my opinion. Bitcoin could be improved to overcome those issues, but it is also possible one of the myriad of alternative coins (called “altcoins”) could become more popular than Bitcoin and eventually replace what is currently the most established and largest cryptocurrency.

Delay in Confirmations

Virtually all vendors require a certain number of confirmations after Bitcoin is sent before it is confirmed and is considered successfully sent. This is to avoid the problem of double-spending.

Bitcoin takes about 10 minutes per confirmation. In the world of the internet, 10 minutes is a long time. Some vendors require 2 or 3 confirmations, which would take between 20-30 minutes. That is a really long time.

Scalability

There are also concerns about the scalability of Bitcoin.

There are probably other reasons that haven’t even been invented yet that could make some new Bettercoin™ a superior choice to Bitcoin.

So while the number of Bitcoins is fixed the number of competing altcoins is not fixed.

Competing altcoins can serve to devalue Bitcoin. I like it when companies compete for my business to lower price but if I owned $1,000 worth of Bitcoin and then BetterCoin™ comes out and everyone switches to it, my $1,000 worth of Bitcoin could drop to a small fraction of a dollar in value.

The United States Commodities Futures Trading Commission (CFTC) declared Bitcoin is a commodity

Which means it’s taxable as a commodity.

Just because the government decrees that something is the case doesn’t mean that it is true.

Various elements of the US government can say that dollars are a store of value but that doesn’t mean they are.

I can disagree with the CFTC intellectually. But I obviously can’t ignore what the government says if I don’t want to get fined or go to jail.

Like most Americans I’m afraid of the Internal Revenue Service (IRS) so compliance with all appropriate tax laws is very important to me.

That means that every time I transact in Bitcoin I have to keep track of my cost basis and pay any appropriate capital gains.

Security

Mt. Gox, Bitfinex, and countless other exchanges have been hacked. You have to be kinda savvy to secure your Bitcoins. Plus, if you go the cold storage route you lose may of the benefits of Bitcoin as a medium of exchange.

What I don’t like about Gold

Gold isn’t used as Money or a Medium of Exchange

Few if any retailers will accept gold as payment for goods and services. One must first convert the gold into money and then spend the money.

Gold is not considered a currency and like Bitcoin does not get favorable tax treatment.

It could be Confiscated

The United States government has made gold bullion ownership illegal in the past and could do so again. Therefore any gold held in the US is susceptible to confiscation. I think it is unlikely this will happen again because not very many people own gold bullion, as compared to years past, but this is a possibility.

You Can’t use it to Buy Stuff Online

I can’t get onto Overstock.com and use physical gold in my possession to buy goods or services. What that would look like would be to mail in a shipment of gold, Overstock would wait until the gold arrives, and then ship out what I ordered.

I think the Paper Gold Markets are Manipulated

I think governments have a vested interest in keeping the price of gold down. I think the gold futures markets are manipulated down. While I think that this manipulation is not sustainable and eventually the price of gold will reflect supply and demand fundamentals, it is annoying in the short term. On the flip side, gold manipulation does provide a lot of great buying opportunities.

What I like about Gold

It’s Been Valued for 3,000 years

Despite all the changes since 1,000 B.C. gold is still valued by billions of people.

It has Significant Direct-Use Value

Gold is used in electronics, jewelry, dentistry, satellites, and decoration. Even though gold is not used as money or a medium of exchange today it is still valued by billions of people.

How many people would want US dollars if they weren’t used as money?

Gold is a Natural Element that Satisfies the Classical Requirements of Money

Gold is one of the least reactive chemical elements. Gold that has been lost on the ocean floor for hundreds of years is still in the same shape it was when the ship went down.

Gold is durable, portable, scare, divisible and uniform. Gold can act as a unit of account, a medium of exchange and a store of value.

Gold is Scarce

A new element that has all the properties of gold is unlikely to be discovered or created.

New gold can only be created in a nuclear reaction and gold can only be pulled out of the ground with significant effort and time.

Mining gold-rich asteroids would also be tremendously expensive and dangerous.

Gold can be used with Payment Technologies

Much of the below thought is from or inspired by Roy Sebag. Mr. Sebag makes a distinction between money technologies and payment technologies.

Money Technologies

Dollars and Euros are debt-based, fiat money technologies or assets that can act as a store of value (albeit poor stores). Gold is an asset that can act as a store of value. Bitcoins are an asset that can act as a store of value.

Payment Technologies

Credit card networks, Paypal, Apple Pay, Bitcoin, and Ether are examples of payment technologies. These are networks and systems that allow ownership of assets to be transferred.

Buying things online with a credit or debit card, Goldmoney, Paypal, or Bitcoin is simply ownership transfer of an asset via a payment technology.

In the case of credit cards, the credit card network is the payment technology and dollars are the money “technology” or asset being transferred.

In the case of Bitcoin, the Bitcoin blockchain is the payment technology which also has an integrated and inseparable unit of account, also called Bitcoins.

Gold can be used separately from a payment system (physically exchanged), or it could be used in conjunction with another payment system.

Goldmoney is one such service that combines physical gold ownership storage and transfer with the payment technology potential of internet based transactions.

Gold remains a fantastic store of value. I think the best of both worlds in money would be a gold-backed currency or electronic ownership transfer of Gold held at a trusted third party.

In Conclusion

Bitcoin has a very low (if any) direct-use value. That fact combined with the potential for Bitcoin to be supplanted by a superior payment technology makes me skeptical of Bitcoin as a long-term store of value.

I like gold because it has a 3,000 year history of being valued across cultures. It’s scarce and I think it’s extremely unlikely that another element will come along that will be able to replace the desired and historically valued properties of gold.

Not only that, but you can still make payments and spend gold in a way that takes advantage of the electronic payment systems that are so useful today.

Ultimately investors and consumers will make their own decisions. Gold and Bitcoin are competitors but they could also continue to exist side by side for some time.

That is just how gold and Bitcoin compare in my view. Which one do you prefer? Let me know in the comments section below!

Multiple Income Streams

Multiple Income Streams

In my culture there is an old adage: “Don’t put all your eggs in one basket.” It’s a quaint agrarian saying that captures a great deal of wisdom.

This principle applies most directly to savings and asset allocation. Savings are key but today I’m writing about income.

Basket of EggsWhen it comes to income the expression is don’t have all your eggs come from one chicken.

In truth many people have almost no income diversity.

To stretch the analogy way to far: most workers have access to one chicken and in exchange for their work they get a small portion of the eggs the chicken lays. If the chicken stops laying eggs or the person who owns the chicken doesn’t want want or need a worker anymore, then the workers go hungry until they can find access to another chicken.

They have their job (and little to no savings or maybe a little to a lot of debt) and that’s it.

If they lose their job and can’t find another one they are in a very bad place. Without a job many people can’t service the debts they have, they can’t pay for their basic needs, it’s a hot mess. An emergency fund and savings are helpful but I was unemployed for 100 days and it was stressful even though I do have savings!

Unless you’re self employed you don’t own your job and can be let go even if you work hard and do a great job!

Losing a job happens all the time. A company gets bought and people get laid off. “My boss is a jerk and I can no longer stand to work for her.” The industry you’re in collapses. Dollars don’t buy as much and a raise doesn’t cover the difference.

Even if you are gainfully self-employed the market you’re in could contract and squeeze your earnings.

Multiple Income Streams

Multiple income streams, income diversification, it means not keeping all of your income “eggs” coming from just one chicken.

ChickenMultiple income streams provides strength and security. If one has multiple streams of income and lives below their means it isn’t a big deal if one of the income streams stops.

If all of your income comes from your job, and you lose your job for any reason, you have to rely on any savings you have until you find another job.

But if you have income from 4 sources and one of them stops yielding; you’re still getting a large percentage of your income.

Going out and getting four full time jobs is probably not possible. I know I’m only one person and can’t be two places at once and there are only so many hours in the week.

Right now my day job is the main engine that drives my economic wagon. But I’m saving money so that won’t always be the case.

I continue to develop additional income streams including ones that make money even while I sleep. Some of the areas I’m capitalizing on are: dividend paying value stocks, bitcoin arbitrage, and trading options. While option trading is somewhat active during regular business hours (unless you place good till cancelled limit orders in the morning or evening), the others can be done with little time outside normal working hours.

I do still want to get into real estate (rental property) that has been on hold until I’m more established in my new career.

Income Streams

It’s popular to talk about diversity and diversification, but when it comes to income the norm seems to be getting one job and working there for a long time. That isn’t always possible, practical or prudent in “today’s economy.” Branching out into multiple sources of income provides most financial resilience and security.