Crypto: Innovation or Insanity? Meme Coins, Hacks, and Strategic Bitcoin Reserves
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 513. It's titled, Crypto, Innovation or Insanity? Meme Coins, Hacks, and Strategic Bitcoin Reserves.

For many years, the United States has had a strategic petroleum reserve. It's the world's largest supply of emergency crude oil, according to the Department of Energy. The oil is stored in huge underground salt caverns at four sites along the coastline of the Gulf of Mexico, sometimes known as the Gulf of America. There's capacity to store 714 million barrels.

barrels. The point of the Strategic Petroleum Reserve is to sell oil competitively in the open market when prices are high. Increase the supply because oil is used in the private sector.

For transportation, for other energy uses and manufacturing, the supply of oil can be disrupted, such as in June 2011 when President Obama directed the sale of 30 million barrels of crude oil to offset the supply disruptions due to unrest in Libya.

Last July, in the U.S. Senate, a bill was introduced to establish a strategic Bitcoin reserve. The point of the bill was to provide for the acquisition and storage of the cryptocurrency Bitcoin by the U.S. government. The bill would have the Department of Treasury purchase 1 million Bitcoins over a five-year period and hold the Bitcoins in trust for

for the United States. They would be held for 20 years unless they were used to retire outstanding federal debt.

To me, this is an example of some craziness when it comes to cryptocurrency. Why does the U.S. need a strategic Bitcoin reserve? Is it to sell Bitcoin if the price gets too high in the same way the strategic petroleum reserve is used? The U.S. has a fiat currency. It's not backed by anything. For

Former Federal Reserve Chair Alan Greenspan testified in front of Congress in 2005, saying there's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The U.S. is not limited when it comes to money creation. Bitcoin is not something strategic used in the U.S. organization.

or global economy. Although there are some uses, it's not a strategic use. The U.S. government is pay-as-you-go. It runs budget deficits. A couple episodes ago, we discussed sovereign wealth funds. One of the categories of sovereign wealth funds or reasons for it were development strategic funds. The idea was to support the growth in the economy and

potentially generate financial returns through investment, but investments in the private sector in the economy, not through speculation on cryptocurrency.

I gave the example of the Irish Strategic Investment Fund. It launched an infrastructure fund to invest in infrastructure. Now, another type of funds, sovereign wealth funds that we discussed was the economic stabilization and reserve funds. These are established by countries that run a trade surplus. And often that trade surplus is due

due to large natural resources reserves. They're selling oil, they're generating a budget surplus, and some of those funds are saved to some type of sovereign wealth fund to be used in the future. But there's a surplus being generated. This year, in over a dozen U.S. states, there are bills going through the legislature right now to permit state governments to invest in

in Bitcoin and to place money in the U.S. strategic Bitcoin reserve. Part of that Senate bill says states may voluntarily store Bitcoin holdings in the reserve in segregated accounts. So legislatures around the U.S. are making laws, debating laws, proposed laws, bills to invest Bitcoin in the U.S. strategic reserve.

For example, in Michigan, they have a countercyclical budget and economic stabilization fund. Sometimes it's called a rainy day fund. It was established in 1977. It had close to $2 billion. It's described as Michigan's savings account to assist in stabilizing revenues during economic recessions. When tax revenues fall off, it can help stabilize the budget.

It's a cash reserve fund, conservatively invested, because they'll never know when they're going to need this cash. It's like emergency cash for a state. Yet they're now debating a bill to allow the state treasurer to invest up to 10%

of available funds in cryptocurrency. Now, as far as I could tell, the state reserve fund doesn't invest in gold or silver or stocks. It invests in treasury bills and other conservative cash-like investments. And now it's going to invest in cryptocurrency. Bitcoin, which went from over $60,000 down to $16,000 over the last couple of years, now it's rebounded.

South Dakota was debating a similar bill. In this case, the legislature turned it down. In the bill, it talked about the type of assets that the state could invest public funds in. Now, this is separate from the state pension plan, which I generally run like traditional pension plans where they can invest in stocks, bonds, properties.

private assets, private capital, such as private equity, venture capital, they're incredibly diversified. But generally, the public funds, state reserve funds are conservatively invested. And you list out what they're allowed to invest in. It's treasury bonds, mortgage-backed securities, could be bonds issued by the state of South Dakota, certificates of deposits. They can also invest in exchange-traded funds or mutual funds that invest in those conservative fixed-income vehicles. And

And now they want to add a new provision in that bill that these state funds could be invested in Bitcoin. That doesn't make any sense. The level of risk is so different from those other investments. There wasn't really any explanatory document. I didn't listen to the debate, but it's incongruent.

Arizona, where we live, is discussing the ability to invest up to 10% of the public monies in the U.S. Strategic Bitcoin Reserve. Now, I have speculated in cryptocurrency since 2015. It comprises over 10% of my net worth, mostly from appreciation. But I have a very diversified portfolio and I'm aware of the risk. I would never invest my emergency savings in Bitcoins.

There are risks with cryptocurrency. We saw that last week with the largest cryptocurrency hack in history. $1.4 billion of Ethereum was stolen. Crypto uses cryptography. These are private-public key pairs that have a mathematical relationship. The private key is kept secret. Public key is public.

And having both allows for a digital signature that can be verified by anyone and money can be transferred. Cryptography like this is very common in the financial industry, but it can be hacked not by solving the cryptography, but by human error. Such as with Bybit, this exchange that was hacked last week, the CEO Ban Jo on

on Twitter described how it happened. They had an Ethereum cold wallet, which means it was offline. It was multi-sig, which means it required multiple signatures by authorized party in order to transfer funds out. And he tweeted that there was this cold wallet that transferred what turned out to be over a billion dollars to a warm wallet, which is a wallet connected to the internet.

He says the transaction was musked, which means that it appeared to be legitimate as it was seeking permission from the authorized signatories to approve the transaction. But when the message was signed and agreed, it actually changed the underlying code of the smart contract in the Ethereum cold wallet and turned out to be the North Koreans were able to access the wallet and transfer the money out.

There have been a number of hacks where using Ethereum, these smart contracts where the code gets rewritten and the money gets taken. Or people can just steal the keys or they lose their wallet. But there are also compromised thefts, financial theft in traditional finance. The Identity Theft Resource Center in its 2024 report tracked over

Over 3,000 data breaches, including financial breaches. Total victims, 1.3 billion people. There were 747 financial services with data breaches. The average cost of the data breach in terms of either money taken or the inability of the business to operate was $5 million.

$3,158 breaches in one year with an average cost of $5 million is close to $16 billion in cost related to breaches compared to the $1.4 billion for the Bybit Ethereum wallet hack, which is huge. And they're trying to get the money back, but money is...

It's digital and it can be stolen. It can be hacked. Now, cryptography could also be hacked by quantum computers, which are still in development. The cryptography used in cryptocurrency and in traditional finance is based on a mathematical principle called a one-way function.

What that means is the public key can be derived from the private key, but you can't derive the private key from the public key. The amount of computing resources it would take to solve to figure out what the private key is as part of the public-private key pair is just astronomical. But it could be done with...

with some type of quantum algorithm on a quantum computer. And if that happens, then that would require cryptocurrency algorithms to be strengthened, including Bitcoin. It would probably require some type of hard fork with a brand new algorithm. And then all the miners would have to agree that this is the new algorithm, but it would be a major change. But financial systems evolve all the time as hackers get more sophisticated.

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Money is digits. It can be hacked. But most money lost in cryptocurrency isn't necessarily hacked. It's lost by unwise speculations. Well, not lost because somebody is on the other side of the trade and winning big.

There are over 10,000 cryptocurrencies. The largest by far is Bitcoin at $1.7 trillion in terms of its market capitalization as quoted in U.S. dollars. That's followed by Ethereum, the second largest, at just over $300 billion. But down at number eight, there's a meme coin, the Dogecoin, worth $30 billion in aggregate.

This was launched as a joke because there are so many cryptocurrencies out there. They just launched it and it became popular. It's like a digital trading card, a digital collectible. Shiba is another one, the 18th largest cryptocurrency by size at $8 billion. On January 17th, 2025, President Donald Trump announced a new Trump meeting.

meme coin. He tweeted on his social network, my new official Trump meme is here. It's time to celebrate everything we stand for winning. Join my very special Trump community. Get your Trump meme coin now. Then it gave the website.

This is a meme coin. It's on the Solana blockchain. So there's a smart contract. There are 200 million of these Trump meme coins on day one will grow to a total of 1 billion over three years. The website says Trump memes are intended to function as an expression of support for an engagement with the ideas and beliefs embodied by Trump and the associated artwork.

and are not intended to be or to be the subject of an investment opportunity, investment contract, or security of any type, even though it is a financial instrument that launched at just about $9 on January 17th and soared to over $70, and now it's trading at $13.

At least 50 large investors made a profit in excess of $10 million on the Trump coin because they invested minutes after Trump announced the meme coin. Meanwhile, 200,000 crypto wallets that got in later, mostly with small holdings, they lost money. In addition, because there's transaction fees, the Trump token has generated up to $100 million in trading fees between its launch and January 30th.

Now, a meme coin is something it's I guess you show support, but by and large, it's an incredibly risky speculation. And most of those that invested in it, as well as the Melania coin meme coin that was also introduced, whoever got in early and we don't know who they are, they made a lot of money. And those that got in later basically lost money.

Argentina President Javier Millet also got into a bit of hot water when it comes to meme coins. In this case, he promoted a cryptocurrency, Libra, on X. This was a coin and looking at the website that was supposed to help invest the proceeds in startups and other businesses in Argentina after Mimei.

Millet tweeted it. The coin soared to $4 before falling to 50 cents and it collapsed. Meme coins collapse. And usually the early promoters can make a killing. Millet said he wasn't associated with this at all. He was just promoting it and there's ethics investigations and they'll work it out. But it is another example of how the initial promoters of meme coins are usually the ones that make much of the money.

Given the silliness, in my opinion, of strategic Bitcoin reserves, the vulnerability of cryptocurrency to be hacked, just like any other financial system. Again, at this point, not through compromised private keys, but just getting access to private keys by humans.

human error, given the collapse of meme coins, it raises the question, what good is crypto? Is it actually used for anything? And it is. If we look at the top 10 cryptocurrencies, two of them are stablecoins, Tether, USDT, and USDC. These are stablecoins that are backed by the US dollar. They own money.

U.S. Treasuries, in some ways, they're like a digital money market account where you take funds and invest them. It's privately sponsored and then they hold the funds and invest them in treasury bills and other very secure assets. Now, at this point, stable coins don't pay interest. We

which means the sponsors of Tether and USDC are making a large amount of money on these asset-backed tokens. Now, you can lend out your stablecoin and earn interest that way, but as far as I'm aware, the native coins themselves at this point don't pay interest. Eventually, they probably will because there is interest being generated because these are asset-backed tokens. How are they used? Well, there are many places around the world

that individuals don't have access to dollars and their home currency is being hyperinflated away. It's not stable. And so their local currency is much more volatile relative to the U.S. dollar, but they don't have access to U.S. dollars, so they can invest or hold stable coins such as USDC and USDT and preserve their value relative to a local currency that might be experiencing hyperinflation.

These same stablecoin networks are used in cross-border payments and remittances, and it's faster and cheaper than traditional payment systems such as Western Union or wiring via bank. It can be done over a cryptocurrency network, and it can be done using USDC. Now, I'll

Recently, USDT announced an integration with the Bitcoin network using the Lightning Network, which is a layer on top of the base layer of Bitcoin, where the Lightning Network, the transactions occur much faster, very, very inexpensive.

One can transfer stable coins over the Bitcoin network, but they could also be done over Ethereum or Solana. But this is dollar backed assets in the digital sphere, the crypto sphere that are being moved around to hold value and to move money.

These are permissionless coins. They're resistant to censorship. So you can hold stable coins or a Bitcoin and keep it apart from the financial system. Your own strategic crypto reserve, if you choose. And many people around the world, they have that in some form because the traditional financial system is untrustworthy in their country.

Now, there's also smart contracts built into Ethereum and Solana that can run some code to do some things. And there's all these different evolving developments in the DeFi space, decentralized finance, trading of securities, all still very much in the early stages. But it's replicating traditional finance in the cryptosphere, generally speaking, with lower costs.

Tokenized assets is something we've discussed on the show a number of times. There are actual money market funds sponsored by BlackRock and HSBC that run on the Ethereum blockchain. Again, somewhat like stable coins, except they're an actual fund created by a traditional finance company like BlackRock.

Ultimately, much of what's going on in the crypto space does replicate what's happening in traditional finance, the ability to have a digital representation of a physical asset, to trade that, to send funds securely, quickly, inexpensively, to maintain value. I allocate to Bitcoin because it is the simplest protocol. Anyone can run the protocol.

Bitcoin protocol themselves on the computer. Everything's public when it comes to the blockchain. At least you can see all the transactions. It's a ledger. And there are a limited number of coins. But it depends on trust. All monetary systems depend on trust.

People accept dollars because they believe the dollar will not collapse while they're holding it in their hands. Monetary networks are similar to social networks. People accept it because of trust. They believe the transaction will go through, that the currency will hold its value in the short term, even though it's fiat, not backed by anything. But in many areas around the world, that trust isn't there. And so they trust social

stablecoin, Bitcoin, and other crypto platforms more than they trust their traditional financial system. Now, why a U.S. sovereign state would want to take some of their funds and invest in Bitcoin other than just to speculate and hope it goes up in price? Or maybe because they believe it's a true store of value.

Why Bitcoin versus investing some of these strategic, the rainy day funds in other assets? Why not stocks? Why not gold? Why is Bitcoin chosen as the asset? I think crypto is here to stay.

I think Bitcoin has a role as a monetary diversification. I just don't think state governments and U.S. governments should be involved in it. They already have the advantage of the trust of using fiat currency. They don't need to diversify their monetary system because that monetary system depends on households and businesses trusting it. And if the government says they don't trust their own money anymore, so they need to diversify into other monetary assets, that doesn't

encourage trust in the fiat currency. So we'll see how it evolves. But there's definitely some craziness when it comes to cryptocurrency, some hype. Beware of meme coins. If you want to invest in crypto, the safest way, the easiest way would be to invest in an ETF that

holds the underlying cryptocurrency itself, be it Bitcoin, Ethereum, or other, and recognize it's a speculation and should be just a small part of our portfolio mix. That's episode 513. Thanks for listening.

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