Welcome to Finance and Fury, the Say What Wednesday edition.

 Last part of a 3 part series from Ryan’s questions – looking at alternative future investment strategies

  1. Episode two weeks ago – went through debt jubilees – Last week went through policies and how these have affected asset prices
  2. This episode we will be focusing on alternative investment options – such as crypto – thinking outside traditional investments like shares or property when it comes to future investment strategies

Before we start – Hypothetical question – what has more value –

  1. A litre of water or a new 60” flat screen TV
  2. Depends on your situation – and perception of value
    1. Most people would say a new TV would be more valuable – as the monetary cost is maybe around $1,000 – water out of the tap is a fraction of a cent – based around that situation – monetary only – TV is better – but what if someone is dying of thirst – water is more valuable – what if in a hypothetical situation in the future – electricity is gone – TV would have no use then and have no value
    2. Price is not value – All assets can be propped up on prices – overdemand – hand sanitizer or toilet paper
    3. Why determining the value of an investment to you is important

Before looking at alternative investments – have to ask the question: What is your purpose of investing? That is where you can get value from

  1. Need to narrow it down – can’t just be something generic like to make money – or become wealthy
    1. Is it for passive income – if so, you need to invest in income paying assets
    2. Is it to accumulate wealth – if so, you need good long term growth and diversification to help protect from downside volatility –
    3. As if you are after something that gains wealth long term – then it Cant be extremely speculative – if goal is to accumulate wealth – and put it into something that only has value due to confidence – can create a situation where your goal is failed -loss of value – in addition – extreme political risks exist with some asset classes –
  2. Each traditional investment is Within the ‘system’ – this can work for people as this system protects its own – through laws – but depending on the type of asset you purchase – this can work in your favour or against you –
    1. For instance – can the investments that you are planning on purchasing be banned
    2. Will the law protect you if something illegal is done in the investments you hold?
  3. This relates to – Crypto – Done many episodes on this in the past – most were last year –older but still relevant – check out
    1. Is Bitcoin the future of money?
    2. If the future of money is crypto currency, why might Bitcoin be a trap?
    3. The BIS versus BTC – What are the plans to replace current crypto currency markets? – Central banks works on Crypto and legislation pieces
  4. Ryan’s made mention of this question – he said “From this point of view I am thinking that bitcoin or cryptocurrencies that can’t be ‘printed’ as such out of thin air and gold to a certain extent will continually rise in the future until something occurs along the lines of the government contravenes and makes policies that forbid people to hold gold or cryptocurrencies”
  5. Two major points here – the supply of an asset and the political risk
  6. For supply – True that Gold cannot be printed out of thin air – but synthetic versions of it can based around futures contracts – also the price of gold can be set by monetary authorities –
    1. Example – to be a money base $10k as a price level is what some like Jim Rickards suggest
    2. Also – some risk of fake supply – few months ago 82t of gold was found to be fake – copper
  7. Each crypto can be capped in supply – but they are exactly printed out of thin air with 1s and 0s – through process of mining – which becomes harder as each token is completed
    1. According to crypto market capitalization aggregators, there are more than 5,000 cryptocurrencies in existence today and over 20,000 different types of markets

Going deeper is bitcoin/crypto as an option?

  1. The valuation side to it is interesting – what do you value BTC in? Is it AUD? Or USD? Think about that –
    1. is it really a new form of money if it is still valued in current currency – not in relation to good themselves
    2. Fractal version of fiat currency – you need fiat money to start with to purchase under current economy
  2. Currencies need reserves to lower chance of going to zero – without something backing it (other currencies, gold, etc.) – no perceived floor in panic – beyond this – confidence is the most important factor now
    1. How do we value currencies? Subjective theory of value – what is the value? What we can use money for – and have confidence in –
      1. This confidence comes from the ability to use it as a medium of exchange – can go buy things with AUD – need to convert back from BTC to AUD in most cases for a purchase
    2. Perception of value is important – what creates this
      1. Reserves and Gov decree – provide lots of subjective value in Fiat – lots of confidence – until there isn’t
        1. Seen currencies suffer massively under this – even with safety measures
      2. Subjective value – when btc goes 11k, is seen as subjective value – speculation in further prices
        1. Has a form of floor value mechanism – cost of mining versus price – if price goes to $2k, nobody mine – supply stop
      3. Confidence – When it is lost – depending on how bad – impossible to regain –requires confidence – or short memory
      4. The fact that BTC doesn’t have an Intrinsic value doesn’t matter as much as how resilient it is to confidence shocks– BTC just went through a confidence shock to the market – faired worse than shares
    3. Doesn’t escape concentrations in control/supply – cheapest power or deepest pockets – China has both
      1. June 2018, over 80% of Bitcoin mining is performed by six mining pools – five of those six pools are managed by individuals or organizations located in China. Other is in Iceland.
      2. First – why concentration in china? Cheap power – mining takes a lot of Electricity power requirements
        1. Why Iceland or China – mining Using as much as Nigeria – 90m people – soon as much as japan
        2. No way it can be allowed if environmentalists get wind – but that is what you need to increase mining incentives – higher prices – current cost of mining 1BTC = $4k USD
  • If prices are low – Then you hit a wall in the mining incentives – chain creation dries up
  1. Second – control of mining production and supply allows price manipulations – unregulated
    1. Painting the tape – a form of market manipulation whereby players attempt to influence the price of a security – buying and selling it among themselves
    2. create the appearance of substantial trading activity. … Painting the tape is an illegal activity that is prohibited – but only in markets that are regulated
  • We are both BTC miners – we both trade the same coins back and forward – slowly increasing the
  1. Also Called a ramp – old trick – think boiler room – painting the tape
  2. Price action is going up – who would have most influence on this?
  3. Could go to $50k – Looks to be having a second wind bubble – Remember the first Massive bubble
  1. Looking back to if Crypto or Gold can be banned – this is all dependent on the legal system and the competition that these types of assets face
    1. Gold – when it was banned it was the monetary backing of the time – and the Government wanted to get as much base for the currency as possible – hence they did a massive gold buy back from the population – were ways around it – collectible coins – but in general – they couldn’t have any competition in money and needed control over the supply –
    2. For Crypto – Central banks – BIS – looking at their own forms of digital currencies –
    3. They may ban cryptos – but only if they see them as competitors to their own currencies –
      1. The types that may be competition are stablecoins – stablecoin can be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities – so if any of these exist that are competition – then they would be first on the regulatory chopping block
      2. Alternatively – if too much money goes into cryptos and it is seen as a destabilising factor – that is also grounds for the powers that be to regulate

Methods of legislation to be used – while Bitcoin and similar payment structures are outside any direct control of central banks and individual governments

  1. BIS V notes that cryptocurrencies ‘can only be regulated indirectly’ and discusses some of the possible approaches.
    1. also note that ‘Since cryptocurrencies are global in nature, only globally coordinated regulation has a chance to be effective.’
  2. What are some methods they can use?
    1. A first key regulatory challenge is anti-money laundering (AML) and combating the financing of terrorism (CFT). The question is whether, and to what extent, the rise of cryptocurrencies has allowed some AML/CFT measures, such as know-your-customer standards, to be evaded.
      1. shutdown of Silk Road, a major marketplace for illegal drugs, suggest that a non-negligible fraction of the demand for cryptocurrencies derives from illicit activity
      2. regulation could focus on the point at which a cryptocurrency is exchanged into a sovereign currency
  • Other existing laws and regulations relating to payment services focus on safety, efficiency and legality of use. These principles could also be applied to cryptocurrency infrastructure providers, such as “crypto wallets”
  1. ensuring consumer and investor protection – common problem is digital theft – access to distributed ledgers are complex – so most users access their cryptocurrency holdings via third parties such as “crypto wallet or exchanges”
    1. Irony is many people turned to cryptocurrencies out of distrust in banks and governments – but are relying on unregulated intermediaries – many examples like Mt Gox or Bitfinex – either being fraudulent or hacking attacks
  2. Major justification – concerns the stability of the financial system may be at risk without taking over cryptos
    1. widespread use of cryptocurrencies and related self-executing financial products will likely give rise to new financial vulnerabilities and systemic risks – Systemic risk is the competition from crypto crashing banking system
    2. cryptocurrencies with regulated financial entities could be addressed – The tax and capital treatment rules for regulated institutions wanting to deal in cryptocurrency-related assets could thus be adapted
  • Regulate the exchanges – where most people trade crypto – you can regulate the crypto markets
  1. policy responses, including regulation of private uses of the technology, the measures needed to prevent abuses of cryptocurrencies and the delicate questions raised by the issuance of digital currency by central banks
  2. There are other laws that can achieve this – such as encryption laws – In the US – Senate Bill 4051, the “Lawful Access to Encrypted Data Act” – LEAD act – was introduced to congress last week
    1. This could effectively make cryptos illegal as they reply on data encryption too.
    2. Your ‘wallet’ is essentially a public key / private key combination – so in theory – only you are supposed to have access to this – but with this legislation the government would have a backdoor to this .
    3. Not going to happen in Aus? Well – we got our own form of this – the Assistance and Access Act 2018 – data encryption laws already in place –

I like the idea of a currency that people can use – but it goes against the foundations of a modern economy –

  1. Not seen as enough of a threat by the monetary powers that be –
  2. Might not be thinking outside of the box enough – Personally – I don’t see Cryptos as an investment
  3. Meant to be a medium of exchange – chances gov lets it take off and replace their own forms of currency is essentially zero
    1. Those who actively trade crypto and know what they are doing can make money off it – just have to declare this as assessable incomes
    2. For me – there is too much volatility and legislation risks to see it as a viable long term strategy
  4. The real meta for future investments – not too dissimilar to that of what has done well – that with real value
    1. In all of this thought and theory – action is more important – decision fatigue – information overload –
    2. Just do and learn from that – few tips on what I have learned – real assets that people will have confidence in and will use –
  5. Bonds – Difference between Corporate credit and Gov bonds – but you wont be as rewarded for owning these due to increased supply or lowering yields when these should rise as risks of default increase
  6. Property in a lot of places is overvalued in its price – but there is some that is not
    1. block of land or an inner city apartment – what has better chance of going up in price from here? Which is already overvalued? A lot of this is monetary policy – but going forward – price growth may have to become reliant on fundamentals – which will lower demand on assets which have larger levels of supply
    2. Usable land – goats – water – own produce – or a house with a block on it has
  7. Shares – ones that people have confidence in
    1. shares in a tiny mining company that is still yet to make a profit or shares in Telstra or WOW
    2. When it comes to returns – you can get specific – growth, income, etc.
    3. Depending on what your requirements are – May be best to avoid indexes – getting a lot of companies in there that may not meet your return requirements
  8. Gold – Own gold as well – I like gold – but it forms its place in my portfolios – as a capital hedge and as a position against the devaluation of cash – gold does have long term growth when valued against cash – but doesn’t pay income
  9. Resources – water – this one is interesting – do another episode on this to expand further

In summary – the investment strategy needs to be what is right for you – but it needs to be specific – not just doing something because it is the next new thing or because everyone is doing it.

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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