I own BTC and I’m adding to my position. I’m NOT ADVOCATING buying BTC. BTC is a mathematical construct and a social compact. I believe it behaves as a volatile store of wealth as well. People often say it’s not “backed by anything”. I don’t see that as true. I bought it with dollars so it’s backed by my dollars. People say but but it has no government. In fact it has a massive totally transparent government. The algorithm is its government

BTC is not a tulip. You can’t just plant a field of BTC cover it with manure and wait for the dough to roll in. It is not a bubble because it is not financed by credit. It’s price discovery is in the open market completely transparent. It is not open to window dressing like share buy back. It’s WYSISWYG what you see is what you get. It is not open to FED manipulation and control by banks. No one skims anything off the top except for the exchange fee. The IRS treats it as property like real estate and stock gains and charges cap gains. Unlike stocks and real estate there are no government incentives to distort pricing. It settles instantly. You push the button and the deal is done permanently and anonymously. The IRS is likely going to force some accounting like a 1099 be reported by the exchange, so what? You get a 1099 on your stock sales as well. The law is the law and the government deserves their cut of capital gains.

BTC is closed ended. It is designed so only 21,000,000 BTC will ever be created, so again it is not like tulips. It is more like gold, another store of value. You mine gold. You also can mine BTC using a computer. There is a certain amount of gold in the world and there is a certain amount of BTC. BTC is created by calculating using an algorithm and as each “coin” is mined by successful calculation that coin is added to the ledger. Once in the ledger that coin can be traded just like gold can be mined assayed turned into bullion and traded. The price of gold is set by a market mechanism and the price of BTC is set by a market mechanism. You can store gold in a safe and you as well can store BTC on a thumb drive in a safe. Once your purchase is on the ledger it remains on the ledger. The algorithm is virtually uncrackable which is why its called crypto. The ledger is peer to peer meaning it’s not stored in one place but is stored everyplace. Since the ledger data is “everyplace” it can’t be stolen or falsified. The algorithm understands cheating and won’t allow it PERIOD. BTC can be stolen like a bar of gold can be lost or stolen. You can loose your thumb drive for example or throw away your computer and loose your account info. No account info no BTC. (not entirely true if your BTC is stored on an exchange). BTC is anonymous. It’s like a Swiss bank account on your phone. You are a number and your account value is a number and there is no way for the system to understand who you are. A brokerage understands but the algorithm does not and it’s perfectly legit to trade outside the exchange. There could be tax consequences for that however. The exchange of value in a transaction is instant. No clearing house or bank or regulators involved. The transactions are world wide, no exchange rates currency markets central bank or government manipulation allowed. This means I can be a sandal maker on a mountain in Peru, I can call NYC and sell a load of sandals to BillyBob’s sandal store for a price in BTC using a satellite phone and as soon as the button gets pressed value is subtracted from BillyBob and added to my account. The transfer is perfectly liquid and perfectly transparent to the ledger and permanent. All that’s left to do is ship the sandals.

This is a HUGE advantage. Consider the infrastructure required to transfer money from NYC to Peru to your bank and have funds become available consider import and export taxes consider the currency manipulation balance of payments etc. All of that is eliminated in peer to peer. The other thing is BTC remains liquid whether the banks freeze up or not. This is the reason I first purchased BTC in 2015. It was during the Greek banking crisis and some rich guy was vaca in the Greek islands. The banks froze up and he most you could get is $50 a day and you had to wait online for that. No credit cards, no checks. All you could spend is the money in your pocket. The guy wanted to go home but he couldn’t buy a ticket. He had BTC, bought a ticket and split for Cali. I had some spare money and decided I wanted some of that kind of liquidity and libertarian money.

Now I see BTC as a diversifier. It has a long enough history it is not going to zero. There is 180B of stored value in the system presently as well as the cost of the infrastructure, which is a world wide peer to peer computer network. The value of the network is probably trillions so there is inherently stored value in the system, and there is no government allowed to borrow against that value or just print money. In the future BTC maybe the reason the internet was invented and not just watching porn. Freedom is a very hard thing to keep in a box once you taste it. BTC is a little like owning BRK-A it’s value is what it’s value is. It is not manipulated by stock buyback or stock splits or leverage. It’s not really open to financial engineering and so doesn’t carry that risk. I read 19% of S&P value is due to financial engineering not productivity. If that’s true owning BTC is way safer than owning SPY for example. If SPY becomes un-engineered 19% of its value disappears. BTC is volatile but if you own a coin you own a coin. aka transparently. If you don’t want to own the vol of BTC, don’ buy it.

It turns out BTC is uncorrelated to stocks, bonds, gold. and cash. It is a fifth form of diversity

You can see its seriously non correlated with any other asset class. Given my understanding and strengthening conviction of a world wide recession on the horizon I want my portfolio to be spread across as many non correlated assets as possible. But I also don’t want to throw the baby out with the bath water. I’ve made a lot of money investing. In the last 25 years stocks and bonds have been the place to be. Stocks are volatile, bonds have steadily ground higher and continue to do so. The long bond hit 1.9 today and the yield curve once again inverted. It is what it is. So now is my time to re-balance percentages out of concentration, and into the safety of greater diversity. To me that means own all 5 non correlated asset classes by selling some (not all) of the most profitable (sell high) and spreading that loot around. This keeps me 100% invested just not 100% invested in stocks. Will I loose money? Relatively unclear. What is clear is if the stock market crashes I WILL loose money, a lot of money because the risk is concentrated. If the dough is better risked across classes I will loose less and maybe even make some in some categories because of the non correlation. People gotta keep their dough somewhere and one categories loss is often another categories gain.

As BTC has been mined initially it was very elastic in terms of supply and demand. In the beginning it was easy to mine, you could do it on a raspberry pi. As more coin is mined the computing horsepower needed has risen exponentially. There are now specific rigs that are dedicated to mining that are basically super computers in their architecture. In addition collaborations of mining computer owners join together to form a mining consortium of computing power and then split the coin according to some algorithm. About 80% of the 21M coin has been mined and as mining progresses it becomes asymptotic in terms of mining horse power vs return. This model in my opinion will inflate the price naturally as the cost of inputs grows. also I think as the number to be mined dwindles the price will become more inelastic and scarcity should drive price. After the crash I predicted the price would stabilize around 9 to 10K. BTC has never gone to zero. It has steadily risen but in a very volatile way so imagine climbing a mountain with a LOT of steep hills and valleys along the way. It’s not that different than the S&P 500 in some respects. There are all kinds of excesses and crashes but the climb is relentless. I expect BTC’s chart will have a similar look 50 years from now. I think the algorithm is designed to pretty much insure that with it’s ever increasing scarcity of new coins. Some predict 25x growth some 40x present value. I’ll be happy with 2-3x. If you own say 100K and in 5 or 10 years that becomes 300K, not a bad deal. In 10 years 100K to 300K @ 2% inflation is 10% return.

China Russia NK Iran and several other countries are proposing a members only crypto currency. This would allow the countries to trade directly without converting currencies or pegging to say the dollar. If China needs natural gas and Russia has some they merely deliver the NG and get paid in crypto and the US doesn’t have anything to say about it or any way to manipulate it. Sanctions smanchtions. The crypto in that system is backed by gold. Presently China has something like 13000 tons of gold and Russia about 10000 tons. US has 8000 used to have 20000. Russia is the second largest gold miner in the world. That crypto is not BTC but if it comes to pass will totally legitimize crypto as world wide concept

The worst month for markets is traditionally Sept. There are 3 days left in Aug and a hurricane is scheduled to arrive at my front door in 5. There’s a metaphor in there somewhere.

8 Replies to “BTC”

  1. Hi Dr. Gasem, Thanks for your clear explanation of why you think BTC is a good diversifier.
    And now that I found your blog thru ERN post, I have gone ahead and read everything that you have published on it since October of last year. Quite interesting and useful. More specifically, I learned much from:
    1. Your focus on in depth planning for Roth conversion and then the withdrawal epochs is quite unique.
    2. And your quantitative approach to optimizing these epochs after-tax results.
    3. Taking into consideration all taxes (income and others)
    4. And potential self-insurance methods.
    5. And then granularly describing your numbers and experiences as you carry-out your plan
    Your suggested approach for a person to do his/her planning in their 20’s, 30’s and 40’s for what you want your life to be from age 65 to death (and legacy) reminds me of what Stephen Covey describes in his book “The 7 Habits of Highly Effective People” as the 2nd Habit “Begin with the end in mind”. Good approach and even better if it is calculated out, mapped/diagramed out and written out as soon as you can. And then reviewed and adapted as needs be on a regular schedule.

    1. Hi Tex-Mex

      TNX for the kind words. If you go to a professional financial planner worth his salt the first thing he dose is figure out what your retirement is going to cost. I calculated mine and it at about 2.6M for 20 years based on my actual historic yearly expenditure, not an estimate or a pipe dream. This is how Bernstein approaches it. Once you know how much you need you can set about funding it. You have to add fudge factors like SORR risk inflation medical disaster increasing taxes, the permutation when a spouse dies, SS etc. Roll all that in and you have the real cost. A lot of that cost will be provided by accrued interest over decades so you have to plan your interest to the end as well. If you save and invest an extra thousand the day you retire and never spend it it will grow to about 10K 30 years later. The typical FIRE approach just waves 4% at it and takes a nap. 4% in a BH3 portfolio fails 10% of the time. Its first failure is actually pretty quick about 10 years in. 20 years is 3% failure, 25 years 6%. So that’s the deal 1/10 fail at 30 years, 1/100 at 10 years . If you didn’t include all the extra razzmatazz like increasing taxes there will be more failure. The problem is failure starts to become significant pretty far into the process when there is little that can be done to stop it. It’s like smoking for 30 years and then quitting the day you get the diagnosis

  2. I wholeheartedly agree with what Tex-Mex is writing above. Your blog is very detailed and it is a freaking plan. I am keen to watch your strategy play out in real time.

    But I still think you should have “run money” Gasem and done anesthesia on the side. You have a deep interest in this stuff.

    So many can do anesthesia but it is rare to have one land a plane safely when it comes to money.

    And I thought Medicine had so much woo woo. Financial services is way worse!!!

    1. This stuff isn’t very involved but thanks for the praise. Running money is too much about sales for me, or if your a trader it will eat you alive. I traded commodities for a while before med school and the amount of work needed to be successful was not trivial. You are going up against markets that are well armed and desire to take all your money. I would not want to be the one who advises against that adversary, but I’m willing to share how I’m defending myself. Great to see you!

  3. I like your thinking in diversifying with BTC.

    Any thoughts of diversifying within the cryptocurrencies? Like buying some XRP or ETH? Or is it just BTC all the way?

    I always like to hear your thoughts. Your plans are always so well thought out!

    1. Hey

      I think the other coins are also rans. BTC is 180B market cap. ETH is 18B ten times smaller. In EU they are familiar with BTC as a means of payment also in some US and Chinese places. I’ve never seen someone who accepts ETH as payment. BTC has a functioning futures and options market I don’t think any other crypto has that. There have been attempts to create ETF’s of crypto so far not successful because of regulators so the government doesn’t want to legitimize a whole stable of crypto probably because of tax reasons and money laundering. Part if not most of the value of the property is the infrastructure and network it possesses and the security it possesses. Being able to hedge with options to a trader is not trivial for example and further legitimizes the property’s value. It’s a bit like the difference between buying a condo in downtown SF or buying a condo on the outskirts of Gilroy next to a garlic patch. You’re playing in a different sandbox. BTC has enough risk surrounding it. If BTC catches a cold the other cryptos catch pneumonia. Diversity is provided by non correlated assets, not by correlated assets and all the crypto’s are correlated at least that’s my estimate. This morning BTC is down. My exchange lists 16 cryptros and all of them except one are down and and of those down they are down more than BTC which means they are more volatile. My goal is portfolio diversity not increased volatility and I do have a clear goal. BTC has plenty of volatility on it’s own which is why I own only dab of it. Homey don’t want all that vol, he just wants a little exposure. Your question is a good one though because it points out a common misunderstanding about diversity. Diversity is not just piling a bunch of similarly correlated properties on top of each other but acquiring properties that behave completely differently in terms of correlation and asset allocation. Cash does not behave like stocks for example. There may be something like “single stock” risk in owning only BTC but all the other coins are basically different flavors of the same thing so it would be like owning 10 oil companies and calling your portfolio diverse.

  4. You have definitely piqued my interest in bitcoin, I was contemplating purchasing it after especially after seeing that Rauol Paul video on Retirement Crisis and at the end he mentions that Bitcoin could be a great opportunity.

    Are there recommended methods of purchasing bitcoin? A certain exchange that is more legit than others, etc? What % of your portfolio do you think it is wise to dabble in bit coin to achieve the intended diversification benefits you are seeking.

    Are there any ongoing fees just to have bitcoin held? (like an expense ratio for mutual funds). And what are the typical transaction costs for 1) purchasing, 2) selling, 3) transacting between two individuals in commerce.

    I have read that Facebook was interested in creating its version of crypto. Would that impact BTC? I would think if an ETF is ever established for crypto it would “legitimize” it in the eyes of the public and that could be a major driving force for driving up prices. The ETF I had read about has a $200k/share buy in though so it is institutional geared.

    And I am a bit confused when you mention that if you lose your thumb drive or computer you could potentially lose your entire holding? Then you went to say unless it is stored on the exchange (how do you ensure your holding is protected on the exchange versus solely your responsibility for keeping documentation you own it?).

    Do you see any scenario that BTC can go to zero and you lost all capital?

    1. BTC is a mathematical construct wrapped in a cryptographic wrapper. To open the construct you need a key. The key is a generated 16 word cryptographic sentence that would take forever to crack and would not be free to crack. Computers eat power and that calculation needs a hydro-electric dams worth of power. If you loose the key your done. If you keep coin on the exchange it is available to you in an account. Still the same cryptography but easier access. If the world ends and you know your key you can still access BTC from anywhere you can access an internet connected peer. You don’t need to go through the exchange since the ledger is open and transparent to every peer. The exchange will automatically reflect the value of your coin since the exchange is a peer. If your coin is on an exchange the exchange knows your key. I store my coin on the exchange but also have my key separately.

      The government is not super hepped about BTC because they can’t easily control it. The government is also not particularly happy with currency for the same reason you can use either one for nefarious purposes like buying and selling weapons or drugs. The gov want’s to do away with cash and go to a system where what you spend and make is completely recorded and taxed immediately. FB is going to facilitate that with their “coin” since FB is a fascist organization that steals your data and mines your life for value. It’s like a leach sucking your blood and as long as it can leach it will give the government what ever they want, so FB’s coin is the opposite of BTC there is nothing anonymous about FB. I don’t think the government wants ETF level legitimacy for a basket of coins. Their in the middle of figuring out policy and don’t need a metastasizing morass of coins and funds adding to the complexity. None the less the government does not have the final word since BTC is anonymous and world wide and under peer to peer control not central control.

      I pay about 15 bucks per $1000 transacted. I’ve only bought and never sold since selling generates cap gains and I have a lot of cap gains in my account. I don’t see any reason for BTC to go to zero. It never has. It possesses value and trades on a perfectly transparent market with instant price discovery. It has a peer to peer network worth trillions. You couldn’t build that network from scratch unless you were a small country. That’s about as much info as I’m going to discuss. If you want to know the nature of BTC do some research or just buy some and see how it acts. Do not think of it like a stock because it is nothing like a stock. Do not think of it like a bond it is not a bond. It is more like a commodity. It has volatility and you can sell high buy low and convert that differential into cash or convert cash into that differential. I’m not a fan of using it for commerce because of the tax issues

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