What kind of money for the rest of us? This is a person of finance show on money how IT works, how to invest IT and how to live without worrying about IT. I'm host David stein.
Today is episode four sixty two. It's title now. Should you buy bitcoin in a tober twenty twenty one? Over two years ago, we released episode three sixty two.
Should you invest in a bitcoin etf? IT was right after the U. S. Security and exchange commission had allow the first bitcoin etf to trade in the U. S except these bitcoin etf didn't hold bitcoin, they invested in bitcoin futures contracts.
For example, the procures bitcoin strategy etf B I T O, that bitcoin etf attracted that a lot of asset over two billion dollars, even though the expense is zero point nine five percent. In the conclusion of that episode, I said, bottom line, don't buy this new U S, based bitcoin futures E T S. They will lag bitcoin.
If you want to speculate in bitcoin, learn how to buy bitcoin on an exchange like coin base and move those asset into cold storage, into a wallet. Go ahead and go through the hassle of buying bitcoin so you can understand the asset. The reason why I was negative on bitcoin etf that invested in bitcoin futures contracts is because of how futures work, even in the perspectives of the process.
Res bit coin T F, IT talks about when rolling futures contracts by rolling one futures contracted expires and then they buy a forward futures contracted expires the next month of the month after, and the Price of these futures contracts are based on what speculators expect the Price of the underlying asset to be, in this case bitcoin. But the problem is often times and especially with bitcoin, the future expectation of bitcoin Price is higher than today, and so the futures curve is is upward sloping, with the current Price being this level and the futures Price being higher than that, and then when the futures contracts mature, the etf goes out and buy the futures contracts at a higher Price. And that dragged down performance is called negative row yield.
And that's exactly what happened back in october twenty twenty one when the procures bit etf was launched, bitcoin was trading at sixty one thousand five hundred and forty eight dollars. As of yesterday, january fifteen, twenty twenty four, bitcoin ts Price was forty two thousand one hundred and fifty two dollars. That's about a thirty two percent decline in bitcoin on accumulated basis.
How did the precious bitcoin etf two its total loss with thirty nine percent, partly because of the zero point nine percent expense asia, but mostly because of this negative royal is rolling over a futures contracts in a situation where the futures curve is update sloping. Now we have a different way to invest in a bitcoin etf. Last week, the U.
S. Security and exchange commissioned approve the listing and trading of a number of spot bitcoin exchange traded products by spot they actually own bitcoin. In the statement that accompanied this announcement, S C, C chair gar gansler point IT that the S, C, C had denied twenty filings for bitcoin E T S from twenty eighteen three march twenty twenty three.
The sec and gansler in particular was very against bitcoin based etf spot E T S, one of those applications. So was the grey scale bitcoin trust, which has A A trust that owns biton GPT c. But the problem with the trust is IT can sell at a premium or discount to its net asset way.
The market Price can differ from the underlying net acid value. There isn't really a mechanism to close that. And so gray scale wanted to convert their trust into n etf so that authorized participants and mark makers could work with gray scales to redeem and create new shares and make sure that the Price of the etf was close to the activate.
The S, C, C disapproved IT or no, you can do that. So gray scale filed a suit, a lawsuit, and U. S. Court of appeals ruled, and gray scales favor, they said that the S, C, C, failed adequate, explain its reasoning in disapproving the listing and trading after that court case, the sec recognize, yeah, they're going to have to approve the and and they did this although in his statement points out that the S C C has only approved one type of cypher currency bitcoin as an etf and that is no way signals that S C C will approve other listed crypto assets as E T S A theory um or others bit coin exception here what's interesting though is is esc still believes that the exchange is in other participants in bitcoin and other crypto currencies. They should be regulated that these crypto assets are securities and should be regulated as such.
In fact, they they have sued coin base, the major remaining crypto broker, for violation security loss and and that's an ongoing lawsuit. What's fascine is eight out of the eleven new spot bitcoin D S, actually use coin base as a custodian. So the the whole litigation and regulation isn't done yet despite the approval of these bit cot s.
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And so as in investors, we can read in detail the perspectives another information on these new bitcoin E T S. They also trade on registered national security exchanges. Is that their own rules to prevent fraud and manipulation and have to enforce the rules. And so this this is a more secure way to gain access the bitcoin.
The S C C points out though that they're not endorsing ing cypher trading platforms or specific securities, and they say most are not compliant with the federal security laws and that they often have conflicts of interest, and that's still to be litigated finally gone, slr said. Metal exchange traded products and invest in gold and others are different because there are consumer and industrial uses. While bitcoin is primarily a speculative value asset that's also used for illicit activity, including ransom money launder ing, sanctions evasion and terrorist financing, that is true, but fios currency is also used for illegal activities.
C, C finally says they've only approved a bitcoin etp that did not approve or endorse bitcoin, and the investors should remain cautious about the married risk associated with bitcoin, and products with value is tied to crypto. Now we have these new etf. They are spotted red by major etf providers.
Eyes shares has a new etf in fast go, wisdom tree, fidelity, ark, Franklin. They are all there participating the fees. Very six of them are starting out with a zero percent expensive show.
Theyve waved the management fee for, in some cases, six months or until assets reach a billion dollars. Case of finality, it's until next july. If we ignore the waiver and look what the actual expenditure will be reasonable.
The cheapest is the bit wise bitcoin etp trust, zero point two percent expensive. A number of them. Most of them are in the twice in terms of the expensive a few or are thirty basis points.
The most expensive is gray scale at one and a half percent. But given the Price competition, the member a number them are are are refiling their application and potentially will be lowering the fees. We have this new product now a way to invest speculate in bitcoin should you well, let's review the the investment case for bitcoin.
What is IT be going to peer to peer version of digital cash? The transactions and ownership is stored on a non centralized public ledger. The concept was based on a nine page White paper by saatchi nac motto, who released IT in two thousand and eight.
Bitcoin IT uses what's known as a proof of work system. All bitcoin is listed on the black chain. A public letter IT details every transaction that has ever occurred using bitcoin. It's specifies which bitcoin addresses control the outstanding bitcoin, the bitcoin protocol. This is software that can download runs on computers, thousands of computers.
And those computers that run the bitcoin application uses proof work mechanism in that they are simultaneously verifying the latest transactions while solving a computational problem, basically a very chAllenging math problem that uses recent and historical transactions as input. And tell you all these watering wn as minors computers running the protocol, trying to solve this computational problem as they verify transactions and make sure there's not double spending of the bitcoin. And whoever saw IT first, they get a reward. They get new bitcoin. Right now, that reward is six point two five bitcoin and that that's how bitcoin created IT.
It's simply created as part of this verification process, this mining process, once those transactions are are verified there, added to the blockchain that the verify transaction was known as a block, and then that is added to the public ledger or blockchain, with thousands of miners competing for this reward as a verify transaction, there is a huge energy cost, and the more servers miners that come on board, the more difficult the computational problem is as part of verification, and the more energy used. And so bitcoin is criticize for each use of of energy is part of the proof of work system. Now of financial systems, the fight system, banking system, they use energy IT.
It's easier to figure out how much energy is being used by the bitcoin network. There's other ways to go about IT. There is what's known as proof of stake, something the a theoria crypt o token eval two, instead of everybody being able to verify transaction is just select parties that that are trusted to do that.
Bitcoin has been around then for over a decade. I started speculating in bitcoin in twenty fifteen. And all throughout the years, more more bitcoin is created as part of the mining process right now.
There's one nine point six million bitcoin outstanding. IT increased just about two percent in the past year. But there's a cap.
The protocol says the amount of bit outstanding will not exceed twenty one million. So there's only two million bitcoin left to be mind as part of this reward mechanism for verifying transactions. Once all the bitcoin is mind, then the verifiers will get some of the transaction fees.
In fact, they they get some of the transaction fees now I believe, and that's really one of the key positives for speculating a bitcoin. The supply a bitcoin is kept and it's not growing as fast as other monetary systems. For example, the U.
S. Dollar, the amount of currency paper dollars, is about two million dollars. We add on bank reserves held at the feder reserve and other investments held at the federal err.
There's about seven point seven trillion dollars of what is known as base money money issued by the U. S. Central bank.
Base money being us. Dollars over the euro has based money the end, but seven point seven trillion dollars in currency and reserves. That's actually decreased ten percent in the past year.
Amount of assets that the federal reserve owns has dropped eight hundred twenty four billion dollars. There has been an increase in bank loan outstanding, which increase the money supply a little bit. Two hundred twenty four billion dollars in new loans.
If we go back to twenty twenty, there's five point three trillion dollars more in U. S. Money supply.
Now it's twenty one trillion dollars, just over five trillion dollars increase since twenty. That huge and IT was because of bank lending. That was because the U. S.
Government was running huge budget deficits in order to combat the economic fallout of covered while the federal service is out buying bonds in the marketplace, essentially monetizing the debt. And that LED to a big jump in household network and the money supply. We have the base money, currency and reserves.
We also have broad money, which includes checking accounts held at banks that includes retail money, market mutual funds. All those are earning basically cash yields. It's cash that could be spent.
That's the money supply over twenty three hundred hours. And then we have a little bit coin with nineteen point six million outstanding growing at a much slower rate than fiat currency. The bitcoin protocol, the public ledger is the equivalent of base money for fiat currency.
And just as fiat currency has additional networks that that ride on top of IT, the commercial banking system, payment apps, paypal, venomous debit cards, credit cards, all these layers that facilitate ease of transactions. So are not having to go to the federal reserve to spend money. In fact, wiring money is actually very, very inconvenient because the company has to work through the banking system.
He felt reserves posty coming out with a new way, a faster way. But additional layers on top of the base layer of money is what makes money so much more convenient for us in using fiat currency. Bitcoin isn't terribly ly convenient to spend with every transaction I send bitcoin to to someone IT IT has to be verified and be part of a block because at all a public ledger.
When I purchased a watch a couple years ago using bitcoin, IT was not as easier as if I just White my credit card, the jeweller had to send me an invoice, and I then I had to get and pay the invoice via coin base. And then once the jeweler that yeah the transaction went through, then after fifteen minutes, I could take the watch out of the store. But there is the opportunity to create additional layers on top of the base lair, a bitcoin, this public letter, and that's actually happening.
It's called the lightning network and there's been some changes to the bitcoin protocol to allow for these additional layers so that transactions can occur off the main public ledger and then aggregated and then added to the blockchain. All monetary systems evolve over our time and and bitcoin is evolving. Now there's also ways to to have kind of more even brought money with big coin justs.
We have banks creating new money through lending the bank money that created that that's private money by the banks is the nominated in U. S. dollars. It's apart from the base layer of the federal reserve in the same way we have the public letter for bitcoin.
But we also had crypt to currency lending account like black fire, where we could put money with black five bitcoin, for example, and then they could lend IT out and expand the broad amount of bitcoin outstanding because I was based on loans now didn't work out so well. Backfire, went bankrupt, as did some of the other crypto lenders. But the same concept there.
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When we think about money and what are some desirable attributes of money, the first is convenience. The ability to spend the money to use IT for bitcoin is money. In the same set, IT can be used for transactions, both legitimate transactions as well as nefertiti transactions as dancer or mention.
But it's not overly convenient because at this point at the base layer, everything has to be approved and verified, just like it's difficult to wire money and get the wire into your bank or your whoever you send IT to that that bed later than interaction is slow. But the additional layers that make them more convenient for fia currency but that that convenient is important. Now there are places around the world where the fight system is broken and money is inconvenient because IT doesn't hold its value.
There's hyperinflation. IT could be an area that has what's known as dollar zone, where that the local fiat system is so broken that the country basically is using U. S. Dollar or some other foreign currency as the mechanism for transaction. But often times it's not enough paper currency available to spend to use.
And so in those cases, bitcoin is actually very useful this transaction because even if you have to wait ten minutes, it's Better that you know the transaction to go through and that the money will be there. The other aspect of money that's important now is does IT hold its value over the long term, most fee currencies don't hold the value because the amount of money being created, the money is supplies growing faster than the amount of goods and services available within the economy. But from day to day, us dollar, the year at the end IT holds value.
You can be sure over a day or two, IT will hold his drive even weeks or a month. In most cases, that's not the case with bitcoin. Over the long term, it's held its value.
I was first buying bitcoin a at two hundred dollars per bitcoin, actually less than that. Now it's is forty three thousand dollars for bitcoin. That means that bitcoin has held its value over the long term relative to fiat currency and good and services, but not in the short term.
I mentioned bitcoin fell from sixty thousand down to forty thousand. In fact, bitcoin bell always down to sixteen thousand in twenty twenty one and twenty twenty two period. That's credibly Violet tile.
And it's hard to have confidence as a merchant if i'm going to take bitcoin except bitcoin. And it's that type of volatility that doesn't lead to to belief and trust in IT. And so it's why bitcoin has not really been accepted broadly as a currency.
IT has been accepted as a speculative store of value in the same way that gold has been accepted as a speculative store of values is just that gold is a physical commodity and bitcoin is a software protocol. Whether is a group of thousands people that believe this useless thing is money, just like millions of millions of people have come together and agreed that fiat currency, which has no intinded value, is money. Fiat currency mostly rides on computer networks.
So this bitcoin bit, bitcoin, has a much shorter history than theatre currency, and certainly much shorter history than the thousands of years that gold has been around this spring. There will be something that's known as a having event. The amount of a bitcoin that will be rewarded for verifying transactions will be cut in half.
That happens about every four years at last, happened in twenty, twenty, twenty one, from over twelve bitcoin as reward to just over six, and now IT will be just over three. That means the supply a bitcoin will be increasing at a slower rate that in the past has LED to a jump in the Price of bitcoin as the supply is increasing at a lower rate. We don't know if that will be the case this year, but IT is happening.
And that's one reason bitcoin has skyrocket in Price over the past twelve months, going from, as I mentioned, sixteen thousand, twenty thousand to over forty thousand today. Now bitcoin is not without risk is fat. All but another way that bitcoin or crypto currency can increase.
And there's over twenty thousand different crypto currencies out there. The miners, those that are running the protocol, there can be some agreement to they want to make some changes to that software. And if there's enough people that agreed to wit and they download the new version of the software and there's a consensus and that's accepted, but there's times when there has been disagreement and the network essentially split is called fork bitcoin.
Cash was created because there was disagreement on some of the miners. They didn't accept the new protocol. And so here another way that the amount of crypt a currency outstanding can increase the disagreement on the protocol.
Now bitcoin cash not appreciated anywhere near what the original bitcoin has. But there there is no assurance that the bitcoin will remain as IT is where the consensus will be there. And that's one of the chAllenges with any monetary system.
There's no guarantee that the U. S. Dollar will continue the way that has. The beauty of bitcoin is at least a protocol as IT set up. There's a cap to the number of bitcoin outstanding.
Now I suppose that could also be changed and that's one of the risk. I IT seems unlikely to raise the cap, the base algorithm. So here we have this new type of money, but not overly convenient.
That doesn't necessarily hold its value over the short term, but has over the long term. And yet it's been in existence for over ten years. And now there's an even more community to to speculate on bitcoin.
We have these etf that the expense tio are low and that potentially will attract more interesting bitcoin because there are etf, there is a mechanism in place to keep the the market Price of etf in line with the value of the underline bitcoin. IT told that was the whole problem with the gray scale bitcoin trust because sometimes to actually a huge premium, sometimes there was a huge discount. There really wasn't a mechanism to redeem and create new shares.
There is with the etf. That's the whole basis of if you read the perspectives of the underlying new bit quality, if they talk about how authorized participants market makers will be able to step in and with arbitrage, hopefully keep the Price of the etf in line with the underline Price of bit going. That remains to be seen.
But etf have generally done a very good job of that. So should you then invest in the new bitcoin? T S, i'm not because at this point, I have enough bitcoin.
I own IT. I use A A treasure wallet. I hold IT offline, the private keys. And i'm not looking to at about five percent of my network. I also have five percent of my network and gold.
So I have these hedges in case fiat currency continues to increase its money supply exponentially. I have some monetary like assets that aren't is convenient as the currency to hopefully spare ahead of inflation. They're not perfect.
Inflation had just neither one goal or bitcoin because they're so valid. But now we have a more convenient way to invest in bitcoin. If you've not if you invest one of the new E T S, I still think it's helpful to get on coin base for some other exchange.
Buy a small portion of bitcoin, send IT to a wallet to your phone, learn how is transacted in bitcoin, just like with gold, until you actually have a gold coin in your hand, you really don't quite get IT the same with bitcoin unless you're able to actually send someone bitcoin. Maybe even buy something with bitcoin, you don't really understand its power. So yeah, perhaps you speculate with a bitcoin tia, but also spend some time understanding how underline networks as for which bit point atf that are all very similar, different is really the fees.
So choose one with low fees and keep an eye on whether there's a gonna be some type of Price war as expense rations could get lower and lower and lower. That episode de four sixty two. Thanks for listening. You may be missing some of the best money for the rest of us content. Our weekly insider s guide email newsletter goes beyond what we cover in our podcast episodes and helps elevate your investment journey with information that works pressed in, written in visual formats.
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