My request would be a how to guide for investing in the speculative/yield farming/staking/Defi Sphere.
I have custody of my own coins in a cold wallet, my BTC and ETH are 60% of the portfolio with some "blue chip/Top 100" (DOT/MATIC/SOL/LUNA/SPELL) alt coins making up the other 40% (no dog coins, lol). I am automatic dollar cost averaging daily on all above protocols from a CEFI.
I have no idea where to start in the Defi space, other than buying the protocol coins themselves from a CeFi, but just buying a curve dao or uniswap isn't really the big picure of Defi, right?
I will make a post within the coming weeks that is a "how to" guide for DeFi and includes a peek into the most common forms of tokenomics that DeFi projects utilize and how to maximize your benefit from those tokenomics as well as a general user guide.
Will also make sure users are aware of gas fees and how certain activities within DeFi can be above and outside of their ability to invest in (on L1 ETH) and where they should go instead if the economics don't quite line up for them to be able to use ETH.
And you are correct, buying the governance token of a protocol is in general not of much value just yet (unless such governance token entitles you to a share of the revenues or has another utility thats valuable), but it is also not a completely valueless endeavor. I suppose I will also wrap a longer version of the explanation of DAOs into that post as well.
To expound : I mean how to and not get swindled, I could go on Zerion on my Ledger and just throw some ETH at something, but that seems like an expensive lesson to learn.
You've said on many occasions that you're almost completely divested from USD. What would you do with a $50,000 emergency fund that needs to be relatively liquid in case of, well, an emergency? Hold USD? Lend USDC on a CEX?
I have an energency fund. I will always have an emergency fund. Its in as liquid a form as possible (a separate checking account not attached to a card). It gains 0% interest. Not possible to be free without such a fund.
I would never recomnend deploying your emergency fund anywhere, its purpose is to be as immediately spendable as possible. I also hold USDC in a smart contract gaining variable interest, I consider it my "crypto emergency fund," but absolutely everyone should have an emergency fund of cash savings. You take inflation on the chin in your emergency fund, but its main purpose is to let you sleep at night knowing you can weather some of the most basic storms life will throw at you.
A lot of the financially successful genXers and millennials I interact with regularly preach the endless benefits of a Roth IRA. Will this remain a viable investment for someone college aged now? as it was seemingly was for them?
I would argue that it was a mediocre investment strategy for them and they just have not realized it. They also have no idea what the tax law and tax regime will look like when they want to withdraw. The main benefit of a Roth IRA is that you pay taxes on the deposit, and then if you follow the rules, you do not pay taxes on any of the gains when you withdraw after reaching 59.5 years of age.
That is a LOT of time from now, and a lot of risk that genXers and millenials engaging in this strategy are undertaking. Who's to say that a more confiscatory form of government channeling the intergenerational ire might not see it within themselves to "close tax loopholes" to "target the wealthy?" I don't know what the level of risk is for that, but I presume it is a non-zero risk.
If you can self-direct the IRA, then yes, it's a no brainer, and there are some options for self-directed crypto. But if it is just being put into general index funds in the stock market, there is a very low chance that they are seeing any significant gains above inflation. It is essentially a savings account that probably tracks at or below inflation on average.
I tend to believe that early Gen X will be the last generation to gain significant advantages from the stock market. Most of the potential for gain is being arbitraged out by computers making micro-transactions in fractions of a second and the general indexes will likely be sideways or negative when measured in inflation. If you can self-direct the IRA and focus on assets that are counter-inflationary (real estate, crypto), then its worth the risk of a potential future tax regime, because that risk is the same one you take when outside of a self-directed IRA. But I genuinely view any such IRA being directed into the broader stock market as a negative yielding asset and not worth the time.
Apr 19, 2023·edited Apr 19, 2023Liked by Flirtcheap
This is excellent, I really enjoyed reading this. Especially the sections on "golden handcuffs," and the temporal and ethereal nature of online personalities.
I'm crypto-skeptic. A lot of people have made a lot of money. The technology is incredible. No disputes there. I have other concerns that a cursory search of your blog did not answer.
The first is that crypto is a purely speculative asset (at least in its current form): it only gains value when people invest in it because they believe its value will rise. It is a place to park surplus capital. QE created a lot of surplus capital in financial markets, which facilitated extraordinary valuations on cryptocurrencies as interest-free money chased high returns. As the Fed sucks liquidity out of markets with QT and starts to correct for the massive asset inflation that occurred under the QE regime, it's hard for me to imagine how high crypto valuations can be sustained.
The second concern is that crypto mining carries enormous material and energy costs. As markets snap up metals and minerals for the renewable transition, demand-side inflation will put additional pressures on a speculative asset. Then there's the supply side. As we slide into the back half of Peak Oil*, where will the surplus energy for crypto mining come from when states need every BTU they can find to keep homes heated through the winter? Again, the margins get tighter.
Assuming you track with these priors, what is the value proposition for crypto in a new era defined by energy / material scarcity? If you don't agree with my priors... why?
Thanks, man. I appreciate your insights and am looking forward to your thoughts, if you have time/interest.
*Global conventional oil production has been plummeting since 2007 despite higher populations, much higher standards of living in places like China, and generally higher demand. Last month WSJ predicted that fracked oil will peak in the next 5 years. The back half of the peak translates to ever-higher energy costs as scarcity becomes the paradigm.
No, it is perfect. I greatly appreciate the detail. I will read it at least twice, and I'll check these links out too. You've challenged a lot of my priors in ways that I can't easily refute, and that means I have blind spots. Thanks for showing me where they are.
Regarding existing market liquidity concerns, we discuss the macro state of the market every week, and I provide short and mid-term price outlooks basically every time I discuss crypto macro. My latest post from this past Saturday is an example but I could point to almost any post from any week really and it's a topic that I am discussing at length.
While the above post is limited to paid subscribers, I discuss the dollar milkshake theory and its current impacts in Section 1 (The first section of every paid post is visible for free subs).
Crypto is indeed a speculative asset, you'll note that when I do have free posts I am often warning people of that and to be wary. My primary thesis about crypto is that the decentralized ledger system is far superior due to the transparency it provides and the potential for a separation of finance and state exists. Below are two free posts on that topic.
People can speculate on price if they want to, and I certainly help them to do that, but I sincerely don't care about price and instead have a belief that one day the need to off-ramp back into fiat will no longer be a concern. We aren't anywhere near there yet, so of course the concern of arbitraging shelter, security, and status by maximizing profit and exit and entry points exist. I'm not blind to that, and I am always providing price and timing info each week for people to manage their own personal DCA timing, or to manage their own positions and leverage.
In general, all risk assets are inversely correlated to the risk free rate of return to some extent, and the risk-free rate of return (rate offered by treasuries) can be readily predicted. There are several potential paths forward, and I outlined them at the start of February and provided a (so far) accurate prediction for both treasury rates and asset prices into the spring.
We are however approaching an inflection point centered first around the debt ceiling, and then secondly around how the Fed manages the ongoing QT in the rising rate environment that we will return to when the debt ceiling is lifted. I think they will have to make a choice based around the private credit narrative I outlined last Saturday and we'll see that choice become the driving narrative of FOMC meetings (and thus speculative traders) in the 2nd half of this year, but that's all I can really predict looking forward.
I genuinely can't say what Powell will do in that situation moving forwards as it will take a while for them to shape this narrative up if they do decided to do that.
You'll note that back in August (behind the paywall) I did provide the market timing and structure that played out for the lows in November.
At that point Powell's playbook moving forward had become clear and the potential for the debt ceiling to be stalled out in December was also beginning to become clear to me, which I mentioned briefly in my free article exploring the Ukraine spending bills to date in October 2022.
The energy for crypto mining is actually fairly inconsequential in context of other activities. ETH has already shifted to PoS from PoW, but most estimates for energy costs in the PoW system made by outsiders were grossly overestimated because they often did not understand how many transactions occur in a block. Which is why even a simple google search will (incorrectly) state that a single transaction on ETH requires 238 kWh of electricity. This is a ludicrous number (for reference, the average american household of 4 uses that much electricity in an entire week). But the figure gets quoted over and over again.
The actual electricity consumption of the entire ETH network (PoS) in an entire year is 2,601 mWh. Last year there were 408.5 million transactions on ETH. This puts the actual energy cost per transaction at 0.063 kWh of electricity consumption per transaction. In comparison, the company paypal consumed 264,100 mWh of electricity in 2020.
But that's PoS, obviously other networks that rely on PoW, like Bitcoin are a lot more energy intensive.
There is essentially an agreed upon tool within the industry for how much power the bitcoin network is consuming at any given time.
Currently that puts the annualized estimate at 147.82 tWh's. That's a lot of energy. But in context, how much energy does the entire worldwide banking sector use right now? Banks have data centers, customer facing facilities, ATM networks, corporate facilities, etc. These add up to an estimate of 260 tWh in just electricity consumption. But if you include the energy used to do physical labor like transporting money, and other necessary functions the annual energy consumption of the global banking sector is nearly 5,000 tWh.
You'll note that many proponents of CBDC's will use the same math or similar math when making a point about the energy savings that a digital dollar or digital currency could bring a country. We already saw basically every miner that had unhedged exposure to the energy markets forced into insolvency in late fall. I did touch on some of these briefly behind the paywall.
The only major miners left simply don't have unhedged merchant risk in the energy markets and are mostly insulated from the supply side inflation. I briefly consulted with one of my previous employers (I was a project developer in the utility energy space) last year in regards to a bitcoin miner they were providing an offtake agreement to. Most miners learned the lesson about merchant risk after the fact in the middle of last year and began seeking out wholesale contracts (when prices were highest, lol too late), but the ones who survived were generally those that had wholesale offtake contracts in place prior to last years energy crunch. This means that a lot of the hash rate has consolidated into less hands than before. This may be a bad thing depending on how you look at it, but I expect this sector to expand over the next few years but with the lessons learned about locking in longer term offtake agreements with major utilities. I don't really buy into the peak oil theory at all, the theory that we are running out was just something I never saw in my experience in the industry. Most industry players do not have an incentive to prove reserves beyond a certain point. There are far more contracts for future exploration that have no proven reserves yet and are simply holding mineral rights for future dates. The WSJ does not have any meaningful insight into the energy industry. While there are certainly questions in Europe and Japan about longer term energy security since they either don't have any (Japan), or they refuse to mine their existing reserves (Europe), those are mainly geo-political questions and not questions of peak oil.
The main risk that most oil exploration companies are dealing with is one of regime risk. Should they spend money exploring for oil reserves in a country that might never let them actually get a return on their investment by mining it.
As an example (lol, I'll quote the WSJ just for fun, I understand the irony in doing so):
Germany likely has more Natural gas underground in Bavaria than the US has shale oil in it's great plains. But Germany, France, the Netherlands, Scotland and Bulgaria all have fracking bans. So no oil company in their right mind would ever bother exploring it to prove reserves. If they ever get desperate enough to actually lift the bans and begin producing they could probably do so for 50-100 years and be energy independent. Or if they wanted to share with the rest of Europe, and others in Europe began their own exploration for energy they likely could be self-sufficient as a continent or even net exporters for decades. You'll often see major media quote proven reserves or existing production figures as proof that we are running out or low on supply because that sells articles, they get clicks on fear-bait content. But the industry really doesn't work like that. They only bother proving reserves and developing production potential if there is a clear runway to turn a profit. This means above all else that they have to have confidence in the government's willingness to allow them to operate unimpeded for years or even decades.
I cover this concept last year behind the paywall on my post about Oil production and outlooks moving forward.
It's one of the reasons why Afghanistan's mineral reserve estimates are meaningless. Until there is a stable government in place that an industry can trust there simply is no way to reliably justify an investment in mining. Realistically the only way to guarantee oil extraction is to militarily invade and occupy the oil fields for a few decades, Exxon can't negotiate with the Taliban. Similarly China can't reliably negotiate to exploit those rare earth metals just yet either.
I have to say, this was fun to read. I really appreciate your insights. I too will never get in the pod or eat the bugs. I admit I actually read this twice, to get the full effect.
This last year I've gotten into the habit of regularly converting my monthly cash savings into physical precious metals with little cash on hand for emergencies. Which now as I type this seems a little irresponsible...BUT consider this:
What if gold and silver spike in the coming months, and basically the value of said metals has now become "dear"? Am I taking too big of a risk in your opinion? This feels somewhat similar to FOMO, but the fundamentals for precious metals being a great hedge against inflation (medium-long term) is solid IMHO. Ideally(?), the spike happens this year and afterwards I build an emergency fund in USD Trash Token and like you mentioned in another comment, I just take the inflation hit "on the chin". I should also mention that I have 3 streams of revenue: a full time job, a small business, and a royalty stream. Also I am regularly DCAing into ETH.
Ultimately what I am struggling most to do is set aside cash. My instincts tell me I need to deploy it into something.
Ignore your instincts. Set up your emergency fund first. An emergency fund is what protects your investments. Your income streams are good, the more the better as it insulates you frok any major life changes, but the emergency fund is a must.
Figure out what 6 months of life costs you and work to have that set aside. It is FOMO to not be doing this. No matter how imminent any financial event may seem, its still not more important than insulating yourself from the basics of life. There will always be opportunities in every market to invest. Do not ever let any one instill within you a sense of financial urgency to do anything. That is often a high pressure sales tactic that is employed by people on this political side of the financial table. Gold and Silver dealers will tell you hyperinflation is coming tomorrow or the US will turn into Venezuela next week. Conatant predictions that this black swan or that black swan will occur in a matter of months. That this institution or that institution is going to attempt to "corner the bitcoin market" next month. Almost always lies to convince you to buy what they are selling now, rather than doing your due diligence and buying when you are ready.
Ignore them all, even me if you begin to feel that pressure here. First thing first, emergency fund. Every permanent slave lives paycheck to paycheck. The emergency fund insures that you aren't doing that. Once 6 months of cash is established, you can then start slowly buying your freedom, and if an emergency occurs, instead of being forced to sell everything and going backwards in terms of how much of your freedom you own, you can instead simply go sideways as you eat through your emergency fund.
Thats another reason why its important to keep your operating costs low. My coworkers in this example has to add $12k more to his emergency fund because of his GTR compared to someone with a modest 10 year old Honda that is fully paid off. And that extra $12k doesn't get him anything extra, it ultimately just buys him the same 6 months of time.
If you have not already it's a great idea to set up a spreadsheet tracking your monthly income vs. monthly expenses as well as how much cash on hand you have saved and the equivalent months of money it adds up to. When directing an investment strategy, a spreadsheet will never lie to you.
Wow, thank you man. I appreciate the genuine response. Paragraph 3 hit home. I’m definitely taking your advice and going to start a spreadsheet as well as build up 6 months of living expenses to set aside and not touch. In retrospect, the answer seems obvious now. But hey, I’m still working on getting rid of the old mentality. Thank you for that!
Hypothetically I buy ETH today and say I pull a Rip Van Winkle type bender for call it 10 years.
Is there not a higher chance ETH in its current fork goes to zero? Consider hard forks, security classification by the US, centralized hosting of the network(e.g., Amazon Web Services), proof of stake complications, unkown unkowns.
Why is the best conservative strategy to not JUST stack sats?
There is a network affect on the current fork. Simply put, there are so many different dApps, and projects being built that the inertia inherent of moving them all off of ETH is reaching a critical mass where a substantial failure event would have to occur to incentivize them to do so. And similarly the team on ETH is fairly competent and motivated to solve such problems, as well as the decentralized nature of the project and familiarity with the coding structure has created a significant army of freelance devs and anons that are constantly trying to fix problems on github, or create L2 solutions to improve the efficiency of ETH. I will go into this in greater detail in an ETH vs. ETH killers post soon.
The issue of centralized hosting if it ever got in the way of smart contracts would present such a large financial incentive for whoever solved it that I suspect an army of coders would be mobilized to accelerate the current developments in decentralizedd file hosting. Otherwise we are a few years out from decentralized file hosting being able to handle the transaction load and call loads for data. At which point, AWS will not have a competitive business model and will be rendered obsolete in the eyes of anyone preferring decentralization.
I believe the US government is too far behind the 8-ball to stop ETH even if they had a concerted effort to stop it, but even if they did so, there are significant financial interests that have begun levering up this summer that would likely lobby to block such efforts.
I believe that the team is competent enough to be able to solve any PoS complications that arise.
But certainly, if you did enter an endless sleep, there would be some risk in the sense that you could not access or change any of your holdings in the case any of these outside events occurred. Hopefully you are able to stay conscious and plugged in so that you could respond adequately to any such black swan event. But if you were to ask me now what the most likely strategy for success is if you had to enter hypersleep for a trip to Andromeda at 0.5 Light speed, I would just point to ETH and wish you sweet dreams.
Hey, honest but lazy question here in the general section...could I please get that Nord VPN link dropped here? Or, direct me to where it is again? I remember seeing it, but, 2yrs of archives is a bit to sift thru, so I ask my honest tho lazy question 🙏
- Hedonic quality adjustments and CPI metric changes
- If it’s not and appreciating asset but we have the option to buy it on loan essentially with you no 0 to 1% interest should we be doing that at this time if it’s something that we can afford versus spending buying it out right with dollars because the dollars are losing value so better to spend them later and lock in that price if that makes sense
- how do you keep track of the aggregate performance of your portfolio? Make your own spreadsheets or any other tools/programs you recommend?
Balance between spending $ vs. experience is a personal question IMO. Once you have an emergency fund and a pipeline driving investments you get to ultimately make decisions about where and how much to spend. So long as you aren't exceeding your income, or have no investment funds available in any given month, then you are fine to make some choices regarding luxury, vacations, fun experiences, etc. That kind of stuff can energize you so long as you are centered in your approach. If you are really in tune with your budget you can make choices on the spot and know that you aren't eating into anything. I remember on a whim paying to upgrade to first class (on a 16h flight) because it felt like it was worth it, and if you were in that situation asking me what to do, I wouldn't have an answer for you without knowing your specific situation. In that case, I had 5x as much extra money in my budget for that month as the 1st class upgrade cost, and I wasn't going to be spending any other additional money that month as I was on back to back work trips when I returned. So there was no negative externality for that. But my friend who was with me wanted to also pay to upgrade, but he was in a very different financial situation (and lol he got mad at me for doing it because he couldn't afford to). Advice for him was of course not to upgrade.
Robots? Don't know, they will be spidered so deep into your life that you won't be able to escape them unless you are separated from technology itself. That will take money.
Precious metals? I like them, I own them, but I'm not buying anymore of them. Will they go up? Probably. Is it a better choice than crypto? Probably not.
Priorities : Savings, Food, Crypto, DeFi, Ammo-Precious Metals in last. I have a stockpile of ammo but don't really see any sort of situation where I am living through an extended civil war and would need a stockpile of ammo. It's a nice to have, but realistically I don't see any situation where you are going to be sitting around needing thousands of rounds with no potential restock. It's good to have, but unless you shoot regularly, it's not a priority. Savings and food should be prevalent first, but once you reach 6 months of money and 6 months of food, you probably shouldn't be prioritizing them anymore and they fall down to last.
What is the question about CPI and hedonic adjustments?
Loans should only be considered in relation to your monthly income vs. monthly expenses. Each incremental loan decreases the breathing room you have between your income and your expenses. I would never make a choice about a loan based on an inflation outlook. Remember, your goal is to buy your freedom by getting your expenditures low enough and your income high enough that you can fund life for yourself for several years. You shouldn't be taking loans out for small things, and when taking loans, they should primarily be for items that will save you money and improve your expenses vs. income. So buying a car might save you money on delivery, buses, uBer, etc. and you can probably make a positive case for acquiring one with a loan. Similarly, a house can allow you to build equity as compared to paying rent and a loan can make sense. But otherwise, you still need to consider your ability and comfort to pay the loan before expanding your monthly expenses. How secure are your income streams? How much time do you want to spend following loans and making sure they are taken care of? Is this asset going to help generate income or is it just a flat expense? How long would it take you to pay it off? Is the asset appreciating compared to the US dollar? There are lots of considerations to make, I wouldn't just presume the loan is a good idea in the face of inflation, as you have to manage your own life first.
I have a spreadsheet that I update once a month (used to be a lot more frequently). I have several spreadsheets that feed into it so I can track my monthly budget, monthly income, monthly expenses, and the performance of my assets and it all feeds into a main spreadsheet. It's a nice way for me to split all forms of income and quantify them agaisnt each other. It can also help me to see what parts of my expenses can be cut or where I can gain money through efficencies by purchasing a product to cut an expense, etc. Also no memberships really fall through the cracks since they are all on the spreadsheet. Theres probably an easier way to do it, but I prefer my own spreadsheets.
Thank you. My questions were varied from the podcast/IG/Substsck. I make notes to myself when I think of something - thanks for advising even though it’s not all crypto related.
The robots are those new ones that have been all over from CES etc. even a hotel I know is using mobile robots for security, but I was thinking more the iRobot ones. I’m kidding about how to k1ll them but not really.
Hedonic you kind of answered already on your IG, you said the unnecessary additions to stuff happened first then they started doing the credit so to speak. I thought it was the other way around...had wanted to know your thoughts on it, and how relevant it is to the understated CPI along with the change in weighting of goods/services.
Thx for your opinion on the other stuff too, it is helpful to understand your approach.
Big fan of Peter and I owe him a lot. Quite a few of his books on my shelf, and I hold a copy of his Dad's book "Federal Mafia," as extremely dear to me.
However I think Peter has dug in against crypto severely and is too caught up in the difference between currency and money. When looked at it from a purely financial sense, precious metals are money, while crypto is merely currency.
But to look at it in a financial sense only is to be completely ignoring the technical side and economies of efficiency it provides to the market. Peter ignores this side of the equation at his own peril and its why he is so dug in against crypto to his own detriment. Its the one smudge on his nearly impeccable record for predicting what is going on in the financial markets.
Say you had a product that could cut marginal expenses on a necessary service by 15%, how much would you value that product? Well you would have to know just how large the expense was that was being cut. 15% on a $100 expense is only a $15 savings, so the entire product couldnt be valued at more than $14 in order for it to still provide a return on investment of at least ~7% (1 divided by 14). But if you are undercutting an industry worth trillions then the valuation of that product could most certainly be significant.
Peter is overlooking just how many middlemen will be replaced by smart contracts and is instead just trying to assess what crypto's market cap should be as a simple replacement for gold and silver. He also views all crypto as interchangeable (they aren't) and believes that at any minute a replacement could be created for one. You will often hear him claiming that bitcoin might be replaced by dogecoin or another such at any given moment. If crypto's only purpose was to replace gold and silver and they all were indeed interchangeable, then yeah, Peter would be right and this would be just a momentary trend. But crypto is coming for the banks, contract lawyers, supply chain management, prediction markets, gambling markets, probate lawyers, the entire music and video licensing industries, file hosting, financial auditing, etc. the list of middlemen that will be replaced with code at fractions of the cost goes on and on. And in that sense, from a value add to society crypto has significant untapped value when looking at how much these middlemen are charging for existing services. They are absolutely going to be replaced over the next 10 years (where people are allowed to choose to do so), and the valuation of crypto is going to reflect this value saved. Will be a few very specific winners based on this great replacement and its the larger picture that I think Peter is missing.
My request would be a how to guide for investing in the speculative/yield farming/staking/Defi Sphere.
I have custody of my own coins in a cold wallet, my BTC and ETH are 60% of the portfolio with some "blue chip/Top 100" (DOT/MATIC/SOL/LUNA/SPELL) alt coins making up the other 40% (no dog coins, lol). I am automatic dollar cost averaging daily on all above protocols from a CEFI.
I have no idea where to start in the Defi space, other than buying the protocol coins themselves from a CeFi, but just buying a curve dao or uniswap isn't really the big picure of Defi, right?
Great idea.
I will make a post within the coming weeks that is a "how to" guide for DeFi and includes a peek into the most common forms of tokenomics that DeFi projects utilize and how to maximize your benefit from those tokenomics as well as a general user guide.
Will also make sure users are aware of gas fees and how certain activities within DeFi can be above and outside of their ability to invest in (on L1 ETH) and where they should go instead if the economics don't quite line up for them to be able to use ETH.
And you are correct, buying the governance token of a protocol is in general not of much value just yet (unless such governance token entitles you to a share of the revenues or has another utility thats valuable), but it is also not a completely valueless endeavor. I suppose I will also wrap a longer version of the explanation of DAOs into that post as well.
To expound : I mean how to and not get swindled, I could go on Zerion on my Ledger and just throw some ETH at something, but that seems like an expensive lesson to learn.
You've said on many occasions that you're almost completely divested from USD. What would you do with a $50,000 emergency fund that needs to be relatively liquid in case of, well, an emergency? Hold USD? Lend USDC on a CEX?
I have an energency fund. I will always have an emergency fund. Its in as liquid a form as possible (a separate checking account not attached to a card). It gains 0% interest. Not possible to be free without such a fund.
I would never recomnend deploying your emergency fund anywhere, its purpose is to be as immediately spendable as possible. I also hold USDC in a smart contract gaining variable interest, I consider it my "crypto emergency fund," but absolutely everyone should have an emergency fund of cash savings. You take inflation on the chin in your emergency fund, but its main purpose is to let you sleep at night knowing you can weather some of the most basic storms life will throw at you.
Thank you.
A lot of the financially successful genXers and millennials I interact with regularly preach the endless benefits of a Roth IRA. Will this remain a viable investment for someone college aged now? as it was seemingly was for them?
I would argue that it was a mediocre investment strategy for them and they just have not realized it. They also have no idea what the tax law and tax regime will look like when they want to withdraw. The main benefit of a Roth IRA is that you pay taxes on the deposit, and then if you follow the rules, you do not pay taxes on any of the gains when you withdraw after reaching 59.5 years of age.
That is a LOT of time from now, and a lot of risk that genXers and millenials engaging in this strategy are undertaking. Who's to say that a more confiscatory form of government channeling the intergenerational ire might not see it within themselves to "close tax loopholes" to "target the wealthy?" I don't know what the level of risk is for that, but I presume it is a non-zero risk.
If you can self-direct the IRA, then yes, it's a no brainer, and there are some options for self-directed crypto. But if it is just being put into general index funds in the stock market, there is a very low chance that they are seeing any significant gains above inflation. It is essentially a savings account that probably tracks at or below inflation on average.
I tend to believe that early Gen X will be the last generation to gain significant advantages from the stock market. Most of the potential for gain is being arbitraged out by computers making micro-transactions in fractions of a second and the general indexes will likely be sideways or negative when measured in inflation. If you can self-direct the IRA and focus on assets that are counter-inflationary (real estate, crypto), then its worth the risk of a potential future tax regime, because that risk is the same one you take when outside of a self-directed IRA. But I genuinely view any such IRA being directed into the broader stock market as a negative yielding asset and not worth the time.
This is excellent, I really enjoyed reading this. Especially the sections on "golden handcuffs," and the temporal and ethereal nature of online personalities.
I'm crypto-skeptic. A lot of people have made a lot of money. The technology is incredible. No disputes there. I have other concerns that a cursory search of your blog did not answer.
The first is that crypto is a purely speculative asset (at least in its current form): it only gains value when people invest in it because they believe its value will rise. It is a place to park surplus capital. QE created a lot of surplus capital in financial markets, which facilitated extraordinary valuations on cryptocurrencies as interest-free money chased high returns. As the Fed sucks liquidity out of markets with QT and starts to correct for the massive asset inflation that occurred under the QE regime, it's hard for me to imagine how high crypto valuations can be sustained.
The second concern is that crypto mining carries enormous material and energy costs. As markets snap up metals and minerals for the renewable transition, demand-side inflation will put additional pressures on a speculative asset. Then there's the supply side. As we slide into the back half of Peak Oil*, where will the surplus energy for crypto mining come from when states need every BTU they can find to keep homes heated through the winter? Again, the margins get tighter.
Assuming you track with these priors, what is the value proposition for crypto in a new era defined by energy / material scarcity? If you don't agree with my priors... why?
Thanks, man. I appreciate your insights and am looking forward to your thoughts, if you have time/interest.
*Global conventional oil production has been plummeting since 2007 despite higher populations, much higher standards of living in places like China, and generally higher demand. Last month WSJ predicted that fracked oil will peak in the next 5 years. The back half of the peak translates to ever-higher energy costs as scarcity becomes the paradigm.
Sorry this comment got really long.
You asked a lot of questions and when given space, I write a lot in general.
Apologies
No, it is perfect. I greatly appreciate the detail. I will read it at least twice, and I'll check these links out too. You've challenged a lot of my priors in ways that I can't easily refute, and that means I have blind spots. Thanks for showing me where they are.
That's a lot of questions in one comment.
Regarding existing market liquidity concerns, we discuss the macro state of the market every week, and I provide short and mid-term price outlooks basically every time I discuss crypto macro. My latest post from this past Saturday is an example but I could point to almost any post from any week really and it's a topic that I am discussing at length.
https://flirtcheap.substack.com/p/review-41023-new-narrative-private
- Last Saturday's post.
While the above post is limited to paid subscribers, I discuss the dollar milkshake theory and its current impacts in Section 1 (The first section of every paid post is visible for free subs).
Crypto is indeed a speculative asset, you'll note that when I do have free posts I am often warning people of that and to be wary. My primary thesis about crypto is that the decentralized ledger system is far superior due to the transparency it provides and the potential for a separation of finance and state exists. Below are two free posts on that topic.
https://flirtcheap.substack.com/p/bitcoin-as-legal-tender
https://flirtcheap.substack.com/p/forecast-81522-separation-of-finance
People can speculate on price if they want to, and I certainly help them to do that, but I sincerely don't care about price and instead have a belief that one day the need to off-ramp back into fiat will no longer be a concern. We aren't anywhere near there yet, so of course the concern of arbitraging shelter, security, and status by maximizing profit and exit and entry points exist. I'm not blind to that, and I am always providing price and timing info each week for people to manage their own personal DCA timing, or to manage their own positions and leverage.
In general, all risk assets are inversely correlated to the risk free rate of return to some extent, and the risk-free rate of return (rate offered by treasuries) can be readily predicted. There are several potential paths forward, and I outlined them at the start of February and provided a (so far) accurate prediction for both treasury rates and asset prices into the spring.
https://flirtcheap.substack.com/p/fomc-government-shut-down-and-the
We are however approaching an inflection point centered first around the debt ceiling, and then secondly around how the Fed manages the ongoing QT in the rising rate environment that we will return to when the debt ceiling is lifted. I think they will have to make a choice based around the private credit narrative I outlined last Saturday and we'll see that choice become the driving narrative of FOMC meetings (and thus speculative traders) in the 2nd half of this year, but that's all I can really predict looking forward.
I genuinely can't say what Powell will do in that situation moving forwards as it will take a while for them to shape this narrative up if they do decided to do that.
You'll note that back in August (behind the paywall) I did provide the market timing and structure that played out for the lows in November.
https://flirtcheap.substack.com/p/review-8122-projecting-a-crypto-double
At that point Powell's playbook moving forward had become clear and the potential for the debt ceiling to be stalled out in December was also beginning to become clear to me, which I mentioned briefly in my free article exploring the Ukraine spending bills to date in October 2022.
https://flirtcheap.substack.com/p/us-spending-on-ukraine
The energy for crypto mining is actually fairly inconsequential in context of other activities. ETH has already shifted to PoS from PoW, but most estimates for energy costs in the PoW system made by outsiders were grossly overestimated because they often did not understand how many transactions occur in a block. Which is why even a simple google search will (incorrectly) state that a single transaction on ETH requires 238 kWh of electricity. This is a ludicrous number (for reference, the average american household of 4 uses that much electricity in an entire week). But the figure gets quoted over and over again.
The actual electricity consumption of the entire ETH network (PoS) in an entire year is 2,601 mWh. Last year there were 408.5 million transactions on ETH. This puts the actual energy cost per transaction at 0.063 kWh of electricity consumption per transaction. In comparison, the company paypal consumed 264,100 mWh of electricity in 2020.
But that's PoS, obviously other networks that rely on PoW, like Bitcoin are a lot more energy intensive.
There is essentially an agreed upon tool within the industry for how much power the bitcoin network is consuming at any given time.
https://ccaf.io/cbeci/index
Currently that puts the annualized estimate at 147.82 tWh's. That's a lot of energy. But in context, how much energy does the entire worldwide banking sector use right now? Banks have data centers, customer facing facilities, ATM networks, corporate facilities, etc. These add up to an estimate of 260 tWh in just electricity consumption. But if you include the energy used to do physical labor like transporting money, and other necessary functions the annual energy consumption of the global banking sector is nearly 5,000 tWh.
You'll note that many proponents of CBDC's will use the same math or similar math when making a point about the energy savings that a digital dollar or digital currency could bring a country. We already saw basically every miner that had unhedged exposure to the energy markets forced into insolvency in late fall. I did touch on some of these briefly behind the paywall.
https://flirtcheap.substack.com/i/80717776/bitcoin-miner-insolvency
The only major miners left simply don't have unhedged merchant risk in the energy markets and are mostly insulated from the supply side inflation. I briefly consulted with one of my previous employers (I was a project developer in the utility energy space) last year in regards to a bitcoin miner they were providing an offtake agreement to. Most miners learned the lesson about merchant risk after the fact in the middle of last year and began seeking out wholesale contracts (when prices were highest, lol too late), but the ones who survived were generally those that had wholesale offtake contracts in place prior to last years energy crunch. This means that a lot of the hash rate has consolidated into less hands than before. This may be a bad thing depending on how you look at it, but I expect this sector to expand over the next few years but with the lessons learned about locking in longer term offtake agreements with major utilities. I don't really buy into the peak oil theory at all, the theory that we are running out was just something I never saw in my experience in the industry. Most industry players do not have an incentive to prove reserves beyond a certain point. There are far more contracts for future exploration that have no proven reserves yet and are simply holding mineral rights for future dates. The WSJ does not have any meaningful insight into the energy industry. While there are certainly questions in Europe and Japan about longer term energy security since they either don't have any (Japan), or they refuse to mine their existing reserves (Europe), those are mainly geo-political questions and not questions of peak oil.
The main risk that most oil exploration companies are dealing with is one of regime risk. Should they spend money exploring for oil reserves in a country that might never let them actually get a return on their investment by mining it.
As an example (lol, I'll quote the WSJ just for fun, I understand the irony in doing so):
https://www.wsj.com/articles/germany-finally-says-the-f-word-fracking-scholz-fdp-bavaria-energy-crisis-russia-putin-nuclear-natural-gas-11665075646
Germany likely has more Natural gas underground in Bavaria than the US has shale oil in it's great plains. But Germany, France, the Netherlands, Scotland and Bulgaria all have fracking bans. So no oil company in their right mind would ever bother exploring it to prove reserves. If they ever get desperate enough to actually lift the bans and begin producing they could probably do so for 50-100 years and be energy independent. Or if they wanted to share with the rest of Europe, and others in Europe began their own exploration for energy they likely could be self-sufficient as a continent or even net exporters for decades. You'll often see major media quote proven reserves or existing production figures as proof that we are running out or low on supply because that sells articles, they get clicks on fear-bait content. But the industry really doesn't work like that. They only bother proving reserves and developing production potential if there is a clear runway to turn a profit. This means above all else that they have to have confidence in the government's willingness to allow them to operate unimpeded for years or even decades.
I cover this concept last year behind the paywall on my post about Oil production and outlooks moving forward.
https://flirtcheap.substack.com/p/oil-after-the-midterms
It's one of the reasons why Afghanistan's mineral reserve estimates are meaningless. Until there is a stable government in place that an industry can trust there simply is no way to reliably justify an investment in mining. Realistically the only way to guarantee oil extraction is to militarily invade and occupy the oil fields for a few decades, Exxon can't negotiate with the Taliban. Similarly China can't reliably negotiate to exploit those rare earth metals just yet either.
I have to say, this was fun to read. I really appreciate your insights. I too will never get in the pod or eat the bugs. I admit I actually read this twice, to get the full effect.
This last year I've gotten into the habit of regularly converting my monthly cash savings into physical precious metals with little cash on hand for emergencies. Which now as I type this seems a little irresponsible...BUT consider this:
What if gold and silver spike in the coming months, and basically the value of said metals has now become "dear"? Am I taking too big of a risk in your opinion? This feels somewhat similar to FOMO, but the fundamentals for precious metals being a great hedge against inflation (medium-long term) is solid IMHO. Ideally(?), the spike happens this year and afterwards I build an emergency fund in USD Trash Token and like you mentioned in another comment, I just take the inflation hit "on the chin". I should also mention that I have 3 streams of revenue: a full time job, a small business, and a royalty stream. Also I am regularly DCAing into ETH.
Ultimately what I am struggling most to do is set aside cash. My instincts tell me I need to deploy it into something.
Ignore your instincts. Set up your emergency fund first. An emergency fund is what protects your investments. Your income streams are good, the more the better as it insulates you frok any major life changes, but the emergency fund is a must.
Figure out what 6 months of life costs you and work to have that set aside. It is FOMO to not be doing this. No matter how imminent any financial event may seem, its still not more important than insulating yourself from the basics of life. There will always be opportunities in every market to invest. Do not ever let any one instill within you a sense of financial urgency to do anything. That is often a high pressure sales tactic that is employed by people on this political side of the financial table. Gold and Silver dealers will tell you hyperinflation is coming tomorrow or the US will turn into Venezuela next week. Conatant predictions that this black swan or that black swan will occur in a matter of months. That this institution or that institution is going to attempt to "corner the bitcoin market" next month. Almost always lies to convince you to buy what they are selling now, rather than doing your due diligence and buying when you are ready.
Ignore them all, even me if you begin to feel that pressure here. First thing first, emergency fund. Every permanent slave lives paycheck to paycheck. The emergency fund insures that you aren't doing that. Once 6 months of cash is established, you can then start slowly buying your freedom, and if an emergency occurs, instead of being forced to sell everything and going backwards in terms of how much of your freedom you own, you can instead simply go sideways as you eat through your emergency fund.
Thats another reason why its important to keep your operating costs low. My coworkers in this example has to add $12k more to his emergency fund because of his GTR compared to someone with a modest 10 year old Honda that is fully paid off. And that extra $12k doesn't get him anything extra, it ultimately just buys him the same 6 months of time.
If you have not already it's a great idea to set up a spreadsheet tracking your monthly income vs. monthly expenses as well as how much cash on hand you have saved and the equivalent months of money it adds up to. When directing an investment strategy, a spreadsheet will never lie to you.
Wow, thank you man. I appreciate the genuine response. Paragraph 3 hit home. I’m definitely taking your advice and going to start a spreadsheet as well as build up 6 months of living expenses to set aside and not touch. In retrospect, the answer seems obvious now. But hey, I’m still working on getting rid of the old mentality. Thank you for that!
Hypothetically I buy ETH today and say I pull a Rip Van Winkle type bender for call it 10 years.
Is there not a higher chance ETH in its current fork goes to zero? Consider hard forks, security classification by the US, centralized hosting of the network(e.g., Amazon Web Services), proof of stake complications, unkown unkowns.
Why is the best conservative strategy to not JUST stack sats?
There is a network affect on the current fork. Simply put, there are so many different dApps, and projects being built that the inertia inherent of moving them all off of ETH is reaching a critical mass where a substantial failure event would have to occur to incentivize them to do so. And similarly the team on ETH is fairly competent and motivated to solve such problems, as well as the decentralized nature of the project and familiarity with the coding structure has created a significant army of freelance devs and anons that are constantly trying to fix problems on github, or create L2 solutions to improve the efficiency of ETH. I will go into this in greater detail in an ETH vs. ETH killers post soon.
The issue of centralized hosting if it ever got in the way of smart contracts would present such a large financial incentive for whoever solved it that I suspect an army of coders would be mobilized to accelerate the current developments in decentralizedd file hosting. Otherwise we are a few years out from decentralized file hosting being able to handle the transaction load and call loads for data. At which point, AWS will not have a competitive business model and will be rendered obsolete in the eyes of anyone preferring decentralization.
I believe the US government is too far behind the 8-ball to stop ETH even if they had a concerted effort to stop it, but even if they did so, there are significant financial interests that have begun levering up this summer that would likely lobby to block such efforts.
I believe that the team is competent enough to be able to solve any PoS complications that arise.
But certainly, if you did enter an endless sleep, there would be some risk in the sense that you could not access or change any of your holdings in the case any of these outside events occurred. Hopefully you are able to stay conscious and plugged in so that you could respond adequately to any such black swan event. But if you were to ask me now what the most likely strategy for success is if you had to enter hypersleep for a trip to Andromeda at 0.5 Light speed, I would just point to ETH and wish you sweet dreams.
Hey, honest but lazy question here in the general section...could I please get that Nord VPN link dropped here? Or, direct me to where it is again? I remember seeing it, but, 2yrs of archives is a bit to sift thru, so I ask my honest tho lazy question 🙏
There is a search feature on the home page, above the catalog of posts (it's a small icon). If yhou search VPN, the post is the first one to come up.
https://flirtcheap.substack.com/p/vpn-usage-for-crypto-and-nordvpn
Here's the link to the post
How you doing man? Everything good?
I'm fine. Coming back to normal content soon
Questions I’ve been accruing
- What/how do you find balance with regard to spending $ vs experience? Is it a vs?
- How do we kill the impending robots?
- What is your overarching view on precious metals?
- Priorities? 1. Savings 2. Food - stockpile 3. Crypto 4. Ammo 5. Precious metals 6. DeFi ???
- Hedonic quality adjustments and CPI metric changes
- If it’s not and appreciating asset but we have the option to buy it on loan essentially with you no 0 to 1% interest should we be doing that at this time if it’s something that we can afford versus spending buying it out right with dollars because the dollars are losing value so better to spend them later and lock in that price if that makes sense
- how do you keep track of the aggregate performance of your portfolio? Make your own spreadsheets or any other tools/programs you recommend?
Balance between spending $ vs. experience is a personal question IMO. Once you have an emergency fund and a pipeline driving investments you get to ultimately make decisions about where and how much to spend. So long as you aren't exceeding your income, or have no investment funds available in any given month, then you are fine to make some choices regarding luxury, vacations, fun experiences, etc. That kind of stuff can energize you so long as you are centered in your approach. If you are really in tune with your budget you can make choices on the spot and know that you aren't eating into anything. I remember on a whim paying to upgrade to first class (on a 16h flight) because it felt like it was worth it, and if you were in that situation asking me what to do, I wouldn't have an answer for you without knowing your specific situation. In that case, I had 5x as much extra money in my budget for that month as the 1st class upgrade cost, and I wasn't going to be spending any other additional money that month as I was on back to back work trips when I returned. So there was no negative externality for that. But my friend who was with me wanted to also pay to upgrade, but he was in a very different financial situation (and lol he got mad at me for doing it because he couldn't afford to). Advice for him was of course not to upgrade.
Robots? Don't know, they will be spidered so deep into your life that you won't be able to escape them unless you are separated from technology itself. That will take money.
Precious metals? I like them, I own them, but I'm not buying anymore of them. Will they go up? Probably. Is it a better choice than crypto? Probably not.
Priorities : Savings, Food, Crypto, DeFi, Ammo-Precious Metals in last. I have a stockpile of ammo but don't really see any sort of situation where I am living through an extended civil war and would need a stockpile of ammo. It's a nice to have, but realistically I don't see any situation where you are going to be sitting around needing thousands of rounds with no potential restock. It's good to have, but unless you shoot regularly, it's not a priority. Savings and food should be prevalent first, but once you reach 6 months of money and 6 months of food, you probably shouldn't be prioritizing them anymore and they fall down to last.
What is the question about CPI and hedonic adjustments?
Loans should only be considered in relation to your monthly income vs. monthly expenses. Each incremental loan decreases the breathing room you have between your income and your expenses. I would never make a choice about a loan based on an inflation outlook. Remember, your goal is to buy your freedom by getting your expenditures low enough and your income high enough that you can fund life for yourself for several years. You shouldn't be taking loans out for small things, and when taking loans, they should primarily be for items that will save you money and improve your expenses vs. income. So buying a car might save you money on delivery, buses, uBer, etc. and you can probably make a positive case for acquiring one with a loan. Similarly, a house can allow you to build equity as compared to paying rent and a loan can make sense. But otherwise, you still need to consider your ability and comfort to pay the loan before expanding your monthly expenses. How secure are your income streams? How much time do you want to spend following loans and making sure they are taken care of? Is this asset going to help generate income or is it just a flat expense? How long would it take you to pay it off? Is the asset appreciating compared to the US dollar? There are lots of considerations to make, I wouldn't just presume the loan is a good idea in the face of inflation, as you have to manage your own life first.
I have a spreadsheet that I update once a month (used to be a lot more frequently). I have several spreadsheets that feed into it so I can track my monthly budget, monthly income, monthly expenses, and the performance of my assets and it all feeds into a main spreadsheet. It's a nice way for me to split all forms of income and quantify them agaisnt each other. It can also help me to see what parts of my expenses can be cut or where I can gain money through efficencies by purchasing a product to cut an expense, etc. Also no memberships really fall through the cracks since they are all on the spreadsheet. Theres probably an easier way to do it, but I prefer my own spreadsheets.
Thank you. My questions were varied from the podcast/IG/Substsck. I make notes to myself when I think of something - thanks for advising even though it’s not all crypto related.
The robots are those new ones that have been all over from CES etc. even a hotel I know is using mobile robots for security, but I was thinking more the iRobot ones. I’m kidding about how to k1ll them but not really.
Hedonic you kind of answered already on your IG, you said the unnecessary additions to stuff happened first then they started doing the credit so to speak. I thought it was the other way around...had wanted to know your thoughts on it, and how relevant it is to the understated CPI along with the change in weighting of goods/services.
Thx for your opinion on the other stuff too, it is helpful to understand your approach.
Speaking of gold dealers and hyperinflation, what do you think of Peter Schiff? What do you think of his critiques on crypto?
Big fan of Peter and I owe him a lot. Quite a few of his books on my shelf, and I hold a copy of his Dad's book "Federal Mafia," as extremely dear to me.
However I think Peter has dug in against crypto severely and is too caught up in the difference between currency and money. When looked at it from a purely financial sense, precious metals are money, while crypto is merely currency.
But to look at it in a financial sense only is to be completely ignoring the technical side and economies of efficiency it provides to the market. Peter ignores this side of the equation at his own peril and its why he is so dug in against crypto to his own detriment. Its the one smudge on his nearly impeccable record for predicting what is going on in the financial markets.
Say you had a product that could cut marginal expenses on a necessary service by 15%, how much would you value that product? Well you would have to know just how large the expense was that was being cut. 15% on a $100 expense is only a $15 savings, so the entire product couldnt be valued at more than $14 in order for it to still provide a return on investment of at least ~7% (1 divided by 14). But if you are undercutting an industry worth trillions then the valuation of that product could most certainly be significant.
Peter is overlooking just how many middlemen will be replaced by smart contracts and is instead just trying to assess what crypto's market cap should be as a simple replacement for gold and silver. He also views all crypto as interchangeable (they aren't) and believes that at any minute a replacement could be created for one. You will often hear him claiming that bitcoin might be replaced by dogecoin or another such at any given moment. If crypto's only purpose was to replace gold and silver and they all were indeed interchangeable, then yeah, Peter would be right and this would be just a momentary trend. But crypto is coming for the banks, contract lawyers, supply chain management, prediction markets, gambling markets, probate lawyers, the entire music and video licensing industries, file hosting, financial auditing, etc. the list of middlemen that will be replaced with code at fractions of the cost goes on and on. And in that sense, from a value add to society crypto has significant untapped value when looking at how much these middlemen are charging for existing services. They are absolutely going to be replaced over the next 10 years (where people are allowed to choose to do so), and the valuation of crypto is going to reflect this value saved. Will be a few very specific winners based on this great replacement and its the larger picture that I think Peter is missing.