I hope there is peace in Ukraine and help for all those impacted and displaced by this needless conflict.
It is certainly an interesting time, with COVID and being on the cusp of World War III. Gold has shown a few signs of life and as of writing this is up to $1,970 per troy ounce, while silver is up to $25.70. These precious metals haven’t been a great hedge against inflation thus far. Even the government admits pricing are increasing year of year by 7.5%, so who knows what it actually is, probably over 10%. However, it is appreciated by anyone holding these asserted that they are up, although it would be better if they weren’t.
Cryptocurrencies have far outstripped precious metals. If you show gold and bitcoin on the same chart gold would look flat. On of my stock picks, Kirkland Lake gold, has merged with Agnico Eagle Mines (AEM) and is up over 400% since I shared that I purchased it back in February of 2017. For ease of tracking, I’m counting AEM as “opened” on February, however, KL shares were converted to AEM shared on 2/9 at a rate of .7935 shares of AEM for each share of KL, and rather than do all of the math to convert the cost, I’m just marking KL as closed as of Feb 2022 and AEM opened as of Feb 2022 even though I never sold this position.
The west has been sanctioning Russia, except for where it actually matters, energy exports. So in a very real sense the west is financing Russia’s invasion of Ukraine. I think XOM and SHEL, two of my stock picks, should continue to do well in this environment.
Another area I’ve been speculating in is cryptocurrencies, particularly on called Chia (XCH). I’ll write more about this in the future. It has better technology than both Bitcoin and Ethereum. It certainly doesn’t have the network effect or name recognition, so it is a long shot, but I think it could do well.
My first article on this website was over 5 years ago, Inflation Destroys Dollars. I certainly did not have any idea that the price inflation would be triggered by the government’s response to the COVID-19 pandemic. I certainly didn’t anticipate the lockdowns and supply chain disruptions back in 2016.
I know the fiscal and monetary policy pursued by the United States and virtually all the world: money printing, onerous regulations, taxes and spending, would eventually result in significant price inflation. Government response to COVID-19 has made the situation worse and pulled the day of reckoning forward but it certainly isn’t the largest factor.
Timing is always a challenge and I was quite early.
Price inflation is here and it is happening fast enough where people notice it and are actually talking about it. Depending on who you trust and how you measure it, prices are rising at a rate of 6-10% per year now. I think what is interesting is that the government’s own numbers (the CPI-U) shows inflation at 6%. This is far beyond the 2% the Federal Reserve has been calling for.
In Inflation Destroys Dollars I write about how gold and silver are an inflation hedge. On 16 May 2016 when I wrote that article, gold was trading at $1,252 per ounce. As I write this it is currently up to $1,864.61, an increase of 48.9%. That is an annualized return of roughly 7.5%.
On 16 May 2016 Silver was trading at $17.14. It is now trading at $25.29. That is a 47.5% increase for an annualized return of approximately 7.3%.
So, if you think that inflation has been somewhere between 4% and 8% over the past five and a half year, gold and silver have on just kept up with inflation during this timeframe. Not bad but also not great. Gold and silver remain the boring reliable hedge and that is a good thing.
Value Stocks as an Inflation Hedge
Value stocks are another asset class I mentioned in Inflation Destroys Dollars. I didn’t mention specific funds. I have made some of my own individual value stock picks with some fantastic picks, but also some not so good picks.
Vanguard’s Selected Value fund (VASVX) is a mid-cap fund that could serve as a proxy for “value stocks”. It was trading at $26.41 on 16 May 2016. It is currently at $33.39. This is a return of 26.4% and an annualized return of 4.3%. Not stellar as I would not say this has kept up with inflation.
The Vanguard Value Index is a large cap value fund (VVIAX). It started this period at $32.49 and is up to $56.68. This is a return of about 74.5% and an annualized return of 10.65%.
A final example to look at, Vanguard’s Mid-Cap Index Admiral Shares Fund (VIMAX) started in this timeframe at $150.33 and is now at $320.62. That is a total percent return of 113% and an annualized return of 14.7%. Much better.
Compare those to the Vanguard 500 (VFIAX), which started this timeframe at $184.53 and is now at $432.9. The total return of this fund was 134.6% an an annualized return of 16.77%.
So while value stock fund did beat the rate of inflation and are a good hedge, they didn’t outperform your vanilla S&P 500 index fund.
Bitcoin as an Inflation Hedge
Compared to gold and silver, Cryptocurrencies, particularly Bitcoin has had all the action.
On 16 May of 2016 a Bitcoin was trading at about $454. Today Bitcoin is trading at $64,346. That is an astounding increase of 14,073% or an annualized return of about 146%.
Clearly Bitcoin has outperformed Stocks, Gold and Silver during this timeframe in an astounding way.
I own Bitcoin and I’m not anti-bitcoin. But I’m also not a Bitcoin maximalist. I think it is possible and perhaps even likely that Bitcoin will be replaced with a superior cryptocurrency that has some combination of faster transactions, higher transaction throughput, anonymity and or additional features. In my view Bitcoin in its current state is too slow and transactions are too costly for it to work as a medium of exchange for day to day transactions. These views are very unpopular with Bitcoin maximalists that ignore or downplay Bitcoin’s weaknesses.
However, Bitcoin has provided an incredible return and far outpaces inflation.
The 14,073% return is not just a result of inflation, although it is increasingly being viewed as a safe haven alternative investment.
Bitcoin has had several great tailwinds 1) It is an emergent asset class 2) It is trendy and popular and gets media attention 3) It is viewed as a Federal Reserve / dollar debasement hedge in place of gold.
Inflation Hedges
Protecting one’s wealth and purchasing power from inflation is important. Just keeping up with inflation is not ideal either, if the assets are not tax advantages, the government will tax the “gains”, and so purchasing power is eroded.
Let’s look at a simplified example. Say you frequently buy a widget or pay a service that costs $100 per year. Say the price goes up 5% per year due to monetary inflation. You also have a $100 investment that also goes up 5% per year. You’re still not keeping up with inflation because of taxes. If your $100 investment goes up 5% to $105, the government is going to want some taxes on that $5 gain. Say you’re on the hook for 15% capital gains taxes, the government is going to take their share and leave you with a $4.25 gain.
So you now have to come up with another $0.75 to pay for the item or service. Scale this up to include all of your expenses for the year and you see that you need to not only keep up with inflation, but exceed inflation so you have the money to pay the taxes on the gains.
In order to keep up with inflation your investment would need to be in a tax advantaged account that would lower or eliminate the tax burden owed or (again assuming a 15% gains tax) you’d need the investment to go up by about 5.9%.
This also shows how insidious inflation is. Not only is money worth less, but the government taxes the gains, even if there was no gain in terms of purchasing power.
One other thing to keep in mind, in the United States at least, realized gold and silver gains are taxed at the generally higher income tax rate rather than capital gains tax rate.
Are Gold and Silver Great Inflation Hedges Anymore
Gold and silver might not be very good inflation hedges anymore. If I owned gold or silver I wouldn’t sell unless I needed to rebalance my portfolio. I would expect these assets to at least keep pace with inflation, but unless the demand for gold and silver increases in excess of new supply, I don’t think gold and silver will beat inflation in the way needed in order to truly hedge for inflation when accounting for taxes. While it has produced a positive return in excess of inflation, it certainly hasn’t been a fantastic play over the last five and half years since I started HowIGrowMyWealth.com.
The world has almost always been pretty crazy. I think there is a bias, which isn’t necessarily a bad thing, to believe that now is a special time, it’s different. Now is “the best of times” or “the worst of times.” In a very real sense the current time IS the most important because the present is the only time we can directly impact. Also as humans we seem to enjoy superlatives. But it’s important to realize that things have almost always been fairly crazy. The world has almost always been mad.
Supply Chain Breakdown
So what is the crazy du jure? Well, the US and probably other countries are realizing what was obvious to anyone who cared to think about it: if you shut down industries, print money, pay people to stay home and otherwise disrupt and destroy supply chains you get price increases, delays and shortages. As if labor wasn’t tight enough, vaccine mandates are driving more people out of the work force.
One of the scariest phrases is “I’m from the government and I’m here to help.” When I heard Biden was going to get involved in the supply chain issues, particularly the ports on the United States left coast I knew it was only going to get worse.
Their brilliant solution? Fine Shipping Companies if their shipping containers remain in the marine terminals for too long. How that will actually enable the shipping containers to get unloaded and moved faster is anyone’s guess. Perhaps the shipping companies weren’t sufficiently motivated before and that was the problem? It makes no sense to me.
But I don’t have the experience in supply chain management that Biden and Harris do. Wait, scratch that, as a kid I worked in a warehouse shipping packages for four summers. Not stellar credentials in supply chain but four more summers experience than these public “servants” have.
Government Dysfunction
Forgive me for repeating myself when I use the phrase government dysfunction. When it became apparent Biden was going to occupy the White House and the blue team was going to have both chambers of congress I thought it was going to be bad. Really bad. I thought it would be bad because I don’t think that taxing, regulating and spending work and that is pretty much all Biden can or would do.
If you do think that taxing, spending and regulating work then we’ve been deprived from the socialist paradise by two moderate Democrats (or if you’re from New York or California, right wing extremists).
I am waiting for the other shoe to drop because Senator Joe Manchin a blue team member from West Virginia and Kyrsten Sinema, another blue teamer from Arizona are actually doing things I don’t wholly disapprove of. Or to be more precise they are not doing things.
That is the standard I have for politicians: did they do one or two things I don’t wholly disapprove of? If so they’re doing pretty good relative to their peers.
When his wife was appointed to a federal position that pays some $163,000 per year for public “service” I thought for sure Manchin was bought and paid for and would march to whatever beat Biden (who whomever is actually in charge of the executive branch) drummed.
But so far he hasn’t.
Manchin has put the Kibosh down on ending the filibuster (which is a racist Jim Crowe relic when anyone but the Democrats use it), he’s stopped the IRS from violating the fourth amendment by being able to snoop on anyone’s bank account with more than $600 $10,000 in transactions in a year, which is basically everyone not on welfare. He’s stopped the carbon tax and done some other good stuff. I didn’t realize there were still moderate Democrats but there is Joe Manchin.
Kyrsten Sinema gets some credit too. See? I can say something nice about Democrats.
Politicians always fail us, usually miserably, so I’m sure it is only a matter of time before Manchin and Sinema are brought in line and they click their heels like a good party members and do as they are told. But not so far.
Biden the Lame Duck
President’s who don’t accomplish anything are great. Gridlock in Washington is great for ordinary Americans. If Biden turns out to be a lame duck that would be fantastic. If you’re on the government dole it is a bummer, if you’re connected with the right folks in government you might not make another few million which is a bummer, but I’m convinced that for everyone else government inaction is a real plus.
Biden’s approval rating is pretty bad. I’m glad the US isn’t officially in Afghanistan anymore and I give Biden credit for having actually withdrawn. Obama didn’t make it happen, Trump didn’t make it happen. Biden (or whomever is actually in charge of the executive branch) made it happen. Full credit for that.
But even still it was a disaster. Incompetent leadership is not without its costs, some of which are deadly serious.
I’m not a military man (and neither is Biden) but why wouldn’t you make sure the US civilians (and Afghan allies) were evacuated PRIOR to withdrawing most of the military? I don’t think you need to have gone to West Point or the Naval Academy to have that instinct. What happened over there makes no sense to me.
Seeing desperate Afghanis clinging to airplane landing gear so they would not be left behind to be killed by the Taliban was disturbing and horrifying. But perhaps the worst was when the United States government killed an innocent family of 10 including 7 children.
That combined with how he is “handling” COVID-19 and the economy I think Biden’s prospects at a second term, should he decide to run, are not great. Disclaimer: “In my opinion the President has more power than he should have but less than people realize. The President gets blamed when the economy is doing poor and gets credit when it is doing well. But it’s all unwarranted.” But while not impossible (as we’ve seen with Jimmy Carter, George H.W. Bush, and Trump in recent decades) it is tough to beat the President in an election.
Regardless I expect the blue teamers to do poorly in the mid-term elections. My political predictions haven’t been stellar, but if history is any guide the party occupying the White House tends to lose ground in the next election cycle, and with Biden being less popular than most things (ok that link is to a satirical news site), I don’t expect 2022 to be any different. At this point in my life, I would be content if no new laws were passed and the government was in deadlock. When either party gets control particularly bad things happen.
Gold Has Failed as an Inflation Hedge
This has been a real bummer because I’ve written about gold a lot. I’ve written about how I think it is an important part of a diversified portfolio. Well inflation is here and gold hasn’t done much of anything. Stocks are up, real estate is up, Bitcoin and Ethereum are up, plywood is up, Costco has reinstated paper towel quotas, even $163,000 a year isn’t enough to buy a US Senator anymore, the CPI for goodness sake, a metric seemingly designed to not measure inflation is up. It seems like the price of everything is up, except gold. Gold is not up. Maybe it is a “barbarous relic”. If you own any I wouldn’t sell it, but it has been a disappointment.
Sure, it had that tease-of-a-run-up in 2020 where it broke over $2,000, but since then it has dwindled and is stuck around $1,800. While it is better than a sharp stick in the eye gold going form $1,500 at the start of 2020 up $300 as of writing this isn’t going to save anyone from inflation. That is about a 20% increase. Meanwhile, the dollar has depreciated some 15% during that time. Not fantastic.
I still think gold is important. It doesn’t have counter-party risk, it’s been subjectively valued for thousands of years. It’s not liable to get replaced by Bettercoin 2.0 like Bitcoin is, but I would have expected it to go up more during COVID times.
The World Has Gone Mad
The world has gone mad, but it didn’t happen in 2020, it happened much, much earlier. Twenty-twenty was certainly crazier than other years but it could have been worse.
I don’t mean to downplay these past few years for those who have lost loved one or who have had their life dramatically impacted by COVID-19 and the ensuing government response. Almost 5 million people worldwide have passed as a result of COVID-19. If you’ve lost a friend, family member, co-worker, teammate or anyone else due to COVID-19 it is not a statistic it is a very real tragedy. If you’ve lost someone because they couldn’t get preventive care or screening because of the lockdowns, if they committed suicide as a result of the social isolation resultant from social distancing policies and lockdowns, if they’ve lost hope because of job losses these are all real tragedies. Perhaps you yourself are suffering. These are all real and tragic realities that we’ve all been coping with to one extent or another.
Having said that I want to end on a (relatively? kind of?) upbeat note. The last couple years have not as bad as the Bubonic Plague outbreak of the 14th century where perhaps 25 million people (about 2/3 of Europe at that time) perished. It’s not been as bad as the 1918 pandemic where perhaps 50 million people died. It wasn’t as bad as the mid 1940s in Europe during World War II when an estimated 50-70 million people died. Or the 1950s in China under Mao where some 30-40 million people died or were killed. Thankfully, nearly 223 million people worldwide have recovered from COVID-19. It’s not like we’ve had World War 3. And while that is a low standard perhaps that is good enough for now. And God willing, perhaps 2022 will be a little better.
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.
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.
I try to avoid being political on this site or at least be apolitical. For example I did not endorse either United States presidential candidate. However, government and politics has so permeated nearly every aspect of our lives in the United States it is impossible to discuss finances and the economy without being at least somewhat political.
Voting outcomes in key swing states are left unknown. But there are a limited number of outcomes with respect to who controls the government. If one party controls the house, senate and presidency, that party (or team) has the opportunity to make sweeping changes to the legal and regulatory framework of the country, with some check on what they can do enforced by the judicial branch/supreme court.
The current balance of power in the United States house of representatives is 232 blues to 197 reds with one libertarian and five vacancies.
Although the results are not finalized we know the blue team will retain control of the house of representatives with something like 227 members (218 are required for a party to control the house). Net the red team will have picked up some seats. Some of the elections are still in counting limbo but those numbers will not change by more than 2-3 seats. So until the next election cycle in 2022 the blue team is guaranteed to continue to control the house.
The current United States senate party division breaks down at 53 red, 45 blue, and 2 independents aligned with the blue team. In other words effectively 53 red 47 blue.
Current senate race results show 48 red and 47 blue. Current forecast predict a 49-49 split with one toss up and one runoff. 51 seats are required to have control of the senate. In the event a vote in the senate is tied, the vice president is the deciding vote. So if the senate does come down to be a 50-50 split, whichever party controls the White House will also control the senate.
Of course there is also the presidency which is up for grabs. I’m inclined to believe that Biden will be declared the next president, regardless of who was actually elected because I think the blues are probably better at “counting” votes. But Trump could still win. Either way this leaves just a few possible scenarios for control of the government.
Remember, if the senate is 50-50 splite, which is possible, control of the senate would go with the team with people in the White House.
Scenario 1: Trump Presidency with Red Team Control of the Senate
In this case there will continue to be a lot of gridlock. There will be a small(er) stimulus bill and some legislation but for the most part not a lot will change. This is the scenario we’ve been in for the past 2 years. Trump could still pull off a victory if he wins Georgia and then if lawsuits could uncover enough voter fraud to turn the right combination of Michigan, Wisconsin and Pennsylvania back to him. It isn’t looking good for Trump but it is also possible that Arizona or Nevada, if they ever finish counting votes, could go to Trump.
Scenario 2: Trump Presidency with Blue Team Control of the Senate
I think this would result in even more gridlock. Congress would not have enough votes to override presidential vetos because that requires a 2/3 vote in both houses. So there would be a lot of back and forth of the blue controlled congress blaming and vilifying Trump and vice versa.
Scenario 3: Biden Presidency with Red Team Control of the Senate
In this scenario Biden is president (at least ceremonially) and Harris is VP. The red team would need to have at least 51 seats. I think this is the most likely scenario but it is by no means certain. Even though at this time I think Biden will be declared president (or if you’re feeling romantic elected) Trump could still pull off some type of upset.
In the senate, to get to 51, the red team would need to win Alaska (seems likely), and one of the Georgia seats (which also seems likely). Then, they would need to win the Georgia run-off on January 5 of 2021, which seems possible.
Note: Explanation of the Georgia run-off can be found here.
North Carolina is being called as a tossup or advantage red team (depending on the source), the red team candidate is currently in the lead by over 96,000 votes with 97% reporting.
If NC does go to the red team candidate and both Georgia seats do as well the red team could get to a 52-48 majority in the Senate.
I think there would be moderate gridlock because Biden was a senator for many, many years and has relationships with the senators and I think the red team senators are much more likely to compromise and go along with the blues. Not only that, but the blues would only need one or maybe two reds to come over to their side and then Vice President Harris could vote to break ties.
Scenario 4: Biden Presidency with Blue Team Control of the Senate
I think this is the second most likely scenario. Again we’re assuming a Biden/Harris administration. Biden would be president but I’m not sure who would be the de facto president in this case.
Blue team would need to win Arizona (seems likely), North Carolina (which is listed as leaning that way). These two would get them to 49, then they’d need to win the Georgia seat (which is listed as a toss-up, although the red is up by over 90,000 votes). This would get them to 50, plus Vice President Harris gets 51. They could also win the Georgia run off election which would get them to 51 even without Harris.
In this scenario the blue team would have the power to implement lots of changes. They could implement the green new deal, raise taxes, increase regulations, expand the affordable care act, provide medicare for all, restrict gun ownership and anything else really. They would probably be limited only by their fear of voter backlash in the next congressional election cycle.
A blue government might be limited in some instances by the supposedly conservative Supreme Court (which is 5-4, since Roberts tends to side with the liberal Justices). However, they could try to implement their plan to stack the supreme court and appoint as many new justices as needed to prevent having their laws struck down as unconstitutional. I don’t know enough about this to have an opinion if they would be successful or not.
What it all might mean
If what I estimate to be the most likely scenario does indeed come to pass the US will face a Biden presidency with a blue controlled house and red controlled senate.
The president has a lot of control over foreign policy. Doubtless the US will be cozier with China and Iran and markets don’t seem to like trade wars, so that would be positive for stocks. However, when there were trade wars, the Federal Reserve has stepped in to be accommodative and the markets love stimulus.
Although purportedly neutral, the president appoints the head of the Federal Reserve and in my opinion (despite protestations of neutrality) the Federal Reserve will do what the president wants for the most part.
While bad for the economy, artificially set rates are great for presidents because they goose asset prices and the stock market is used as a proxy for how the economy is doing.
I doubt there will be a stock market crash, as fiscal stimulus will be used to prop up asset prices. I do expect deficits to continue to grow unchecked and I think gold and the right foreign stocks will do well.
Worst Case Scenario
With a Biden presidency and blue team ruled congress a lot of socialist policies will be implemented. Higher taxes, a stricter COVID-19 response, wealth redistribution and increased government regulation. I think this will be negative for the economy with the middle and lower classes hurting the most. Alternative energy companies and select industries would do well in the US, but gold and foreign stocks would also benefit.
I was watching a video the other day by a famous YouTuber. He specializes in “modern homesteading” and I find some of his videos informative and entertaining.
However, he went off the rails with one of his comments.
He mentioned someone asked him if they should buy gold and he pointed out that you can’t eat gold.
I’m rather tired of this silly cliché. So I’ve decided to give this line of thinking a name.
Batteries are not edible. Please do not eat batteries.
The “Can I eat it?” School of Investing
The “Can I eat it?” school of investing is simple. People trained in this method rule out any investment or purchase they can’t eat.
For example, if someone were to ask, “Should I buy a car?”
Answer: “Well, you can’t eat a car, so what is the point?”
“Should I buy stock in Netflix?” “You can’t eat Netflix, so no.”
To be honest I‘ve never heard anyone make the “You can’t eat it” argument for any other investment or purchase decision. But for some reason when it comes to gold people think it is important to be able to eat it.
The notion that you have to be able to eat something in order to want to own it reminds me of small children at that developmental stage where they tend to stick everything in their mouth.
It seems like a fair number of people don’t understand the purpose of gold and so they revert to that childlike instinct of sticking in in their mouth.
I Buy some things knowing I Can’t Eat Them
As it turns out, there are many useful things that people might want to own that in fact can’t be eaten.
Some people have decided that it makes sense to allocate a portion of their savings to physical gold as a way to “store value” (Austrian economists: please don’t take that phrase too technically) and protect purchasing power against inflation and dollar devaluation.
Of course it only makes sense to own gold after you own a lot of other basic necessities.
But if you really must be able to eat an investment for you to be able to consider it–I give you the following dish which uses edible gold leaf as a garnish.
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