El Salvador Mines Free Money

El Salvador declared BTC as legal tender. Not as a substitute for the Salvadorian Colon’ but as a parallel currency. BTC is a means of world wide transfer of money and much of Salvadorian economy is based on remittance from abroad. BTC is a means for individuals to save. It’s volatile but it’s property none the less and never has gone to zero. BTC can be borrowed against and lent. My Coinbase account pays 6% if I choose to tie it up, and I can borrow about 10% of my principle value. Not much need of an “emergency account” if I can borrow 100K against 1M BTC using a mouse click. All of this is swell and may make a difference to commerce in El Salvador but how do they mine free money?

El Salvador’s power generation is state owned. The power source is geothermal from Volcanos. El Salvador has many volcanos. BTC is hard currency meaning there is a basis for it’s value. In that respect it is like gold. Gold costs about $900 dollars an ounce to mine. Anything above $900 is profit. Below $900 the mine shuts down. There is therefore an energy equivalent measured in GW which is equivalent to an ounce of gold. Energy is the universal currency. BTC likewise has an energy equivalent. The data looks like it takes 72 terawatts of power to mine 1 BTC, and it takes 10 minutes to mine a BTC. Geo-thermal power generation is 95% efficient in El Salvador. The byproduct is water vapor as in nearly 100% green. So El Salvador turns an abundant natural resource (heat) into money in a highly efficient way to benefit it’s citizens, and the result is portable and enriches a poor country. Effectively El Salvador is turning heat into gold in a way that does not harm the environment.

El Salvador isn’t the only one. Greenland uses abundant geo-thermal and hydro-electricity to mine BTC. Greenland is the worlds largest Island. It is a true land of power. People laughed at Trump for wanting to buy Greenland, but if you can mine BTC for free maybe it’s not that stupid. Greenland has no way to export it’s riches of power as it’s an Island that sits between the Arctic and Atlantic oceans, but I bet Greenland has no trouble exporting BTC. BTC in fact becomes the transmission wires that connects Greenland and those who need what Greenland has to offer. I wonder how many GW of power are used to dry people’s underwear or heat up their coffee or run the refrigerators and A/C?

Imagine how many poor countries are sitting on the gold mine of BTC mining. Imagine the international commerce that natural resource will provide.

Boom Bust Echo How to Analyze Retirement income

I often see retirement income analysis in the FIRE Blogoland use these phrases: “SS, that will be my gravy” or “SS, it won’t be there by the time I retire!”. If SS isn’t there when YOU retire, YOU won’t retire, PERIOD. Your non SS nest egg will be looted by the government to pay for those expecting SS. A form of this is going on now with the proposed income redistribution in Biden’s tax law. The SS law is written such that if the fund runs a deficit it is cut by 24% which is slated to happen about 11 years from now. 75% of something is still a pretty significant something. If your retirement analysis is so cavalier as to ignore or dismiss a significant source of guaranteed, tax advantaged, inflation adjusted, (but apparently not deflation adjusted) retirement income with the wave of a hand, YOU’RE AN IDIOT and deserve your dogfood. SS is not gravy, it’s high quality meat almost as good as Roth tax protection.

TIRA Pot

From a tax perspective different pots of money have different value to the retiree. The least advantaged pot and also the biggest untaxed pot is the TIRA. The TIRA allows you to put ordinary income money in tax deferred, but requires you to remove money which is taxed as ordinary income, in a exponential way. If tax = amount * RMD and RMD is an exponential (non linear) function, Tax is an exponential (non linear) function. To calculate RMD for any given tax year I use THIS CALCULATOR, which is a government calculator consistent with the tax code. You can play with examples, for instance:

Age 72 RMD of a 500K TIRA has a withdrawal factor of 25.6 and a value of $19,531.25. The % withdrawal rate at age 72 is 100/25.6 or 3.9% of that years TIRA value.

At Age 82, if the TIRA still holds 500K, the RMD that year is $29,239.77 with a withdrawal factor of 17.1. At 82, 5.84% of your 500K is withdrawn to be taxed as ordinary income. An additional 10K can easily tip you oved to a higher tax bracket, which incurs a higher tax rate, the double whammy. Under present tax law, if you take standard deduction, married filing jointly, both spouses over 65, the allowable bracket 2 income is 104K with a 12% top tax rate. The next bracket is 22%. So you pay on more ordinary income at higher rates as you age.

SS Pot

The much maligned SS by law belongs to you. From SS.gov:

“We base Social Security benefits on your lifetime earnings. We adjust or “index” your actual earnings to account for changes in average wages since the year the earnings were received. Then, Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.”

In addition SS is based on a multiplier, which is keyed to something called FRA (full retirement age). In 1998 Bill Clinton liked to brag how he ended with a “surplus”. How did Clinton get his surplus? He got it on my back. In 1998 I was 46 and SS retirement age was 65. By law my retirement age was raised to age 66, so the government “saved” one year of my SS. My wife had her FRA raised to age 67 and the government “saved” 2 years on her SS. This resulted in Clinton’s “surplus”. This same technique will be applied to the echo generation, the Millennials. Gen-X, the bust gen, probably won’t get hammered or maybe half hammered as I was half hammered. Boomers were a BIG generation and more ale to withstand the abuse. X-ers smaller and less able. Millennials once again are Big and will likely get hosed.

SS payout is a function of when you retire. The first available retirement date is age 62 and you can receive 70% of your FRA benefit, (typically 5 years early). If you wait till 70 your benefit will increase 24% (3 years surplus). In my case my surplus was 4 years since my FRA was 66, so my increase is 32%. SS is actually judged on months, not years and you can add that complexity if you like. My example will be based on years.

You’re SS will be based on your best 35 years of income and your FRA and your retirement date. Your income data is available to you on SSA.gov if you have an online account. I’ll work through an example using my own data. My FRA monthly SS is 3K/mo. My FRA was age 66. I choose to wait till age 70 to claim my benefit. My benefit increased by 8%/yr past age 66, so my retirement benefit at age 70 will be about $3900/mo. My wife worked prior to children. Her benefit at age 62 when she chose to retire was 750/mo. SS allows the spouse to apply for spousal benefits which is 1/2 of the spouses SS. In my case that was 375/mo. So OUR benefit post her age 62 is $1125/mo or $13,500/yr. Of this only 85% is taxable aka $11,475 as ordinary income. In addition that $13,500 is inflation adjusted. (I don’t know if it’s also deflation adjustable.) $11,475/yr easily pays our health care expenses and the $2025 (15%) in tax savings pays the taxes.

Upon age 70 I will claim $3900/mo and she will claim 1/2 of that or $5850/mo total or 70K/yr. Of that $59,500 will be taxable. Since the tax bracket tops at 104K, I basically have $44,500 of remaining 12% bracket ordinary income I can add and remain in the bracket. Perhaps you think 70K/year of tax advantaged income is gravy, but to me it’s the meat.

In the above example my age 82 RMD on a 500K TIRA+ SS would be $99,239 and my taxable would be $88,739 still over $15K below the top of the 12% ordinary income bracket. That $15K gives ample leeway for “some” inflation. SS plus a correctly sized TIRA is a goldmine and certainly NOT gravy.

My technique to empty my TIRA uses a SOR twist. Based on the way the tax law is written, my SS constitutes the bulk of my yearly ordinary income. You also have to consider income from taxable accounts in the stream. Finally a contribution from TIRA is added OF AT LEAST the RMD is added. You can always take out more than RMD but not less. 500K at 6% throws off about 30 K/yr. The age 82 RMD is about 30K/yr. The age 70 amount between SS and 104K is about 44K. This means you can fill up to 44K from TIRA and dividends at age 70 and remain in the 12% bracket. That 44K will remain relatively constant up to about age 87, but the RMD will become an ever increasing % of that 44K. This keeps you in the 12% bracket pretty much till you’re dead. Let’s say at 74 the market is up and your 500K becomes 540K. Withdraw 40K that year. You are still below the 104K limit. Lets say at 76 the market tanks and your 500K becomes 400K. Simply withdraw the RMD on 400K or $18,181,82. This is the SOR safety valve. In down markets take the least money. Continue to take only the yearly RMD until the TIRA regains 500K which gives the TIRA a chance to recover. If you need extra money use Roth Money (no tax) or Taxable (cap gains tax) money to supplement, or a combination of both based on tax loss harvest.

Cap Gains Taxable

SS is a very valuable pot, and a correctly sized TIRA can provide a low cost income up to the top of the 12% bracket. Taxable money has it’s value in the way it is taxed. There can be ordinary income or not depending on what you own. Some people want dividends. Dividends tend to force you into non diverse situations. Dividends are often higher in certain sectors like utilities and these sectors often forego growth opportunities. If you have the time and skill you can create a portfolio out of preferred issues which has a more diverse sector mix but devising such a portfolio is not a button press process.

Cap Gain Taxable money has certain advantages from a legacy perspective. It’s already been taxed once as ordinary income. When you buy 100 shares of IBM with cash, the cash has already been taxed and forms a basis. If you sell above the basis you incur a cap gain and below a cap loss. Your cap loss is accumulative and can be used to offset gains at a later date. This gives rise to the process of tax loss harvesting and basically moves cap gain taxable accounts toward the Roth end of things. Where TIRA is taxed as ordinary income cap gains tend to be lower and can be offset by judicious losses. They also aren’t subject to the 10 year distribution problem on inheritance. These advantages can be used to make your taxable money Roth like. Say you have 1M in taxable money and have managed over decades to acquire 500K in tax loss. This means you can slowly withdraw 500K of your 1M tax free, giving time for the 1M to continue to grow. If pull out 50K/yr and your 1M grows at 6% at the end of 10 years you pull out 500K tax free and have 2.5M in the account. This is very useful and makes taxable money very valuable.

Roth

I consider this the last money to spend because it grows tax free. This is old age money, money to fund your assisted living situation, money of self insurance. The top diseases in the US are Heart, Metabolic, NDD, and Cancer and each of these has a long term expense, sometimes decades long, and if married filing jointly each spouse is liable to a long term expensive demise. A well seasoned Roth account and its tax free compounding is your oyster when it comes to the far distant future expenses.

Demographics

If you look at the above chart it shows the burden of distribution across the generations. My burden as a Baby Boomer was raised (age 67 FRA) to pay for my Mom and Dad. Gen-X is a bust so likely they will just be added as a tail to the Boomers when it comes to paying for SS. My guess is Millennials will suffer another change in FRA. If you look at the Secure act RMD was raised to age 72 and if Secure 2 passes will be further raised to something like 75 when fully implemented. Even I will be eligible to Roth conversion to age 73 if that act passes. To me this looks like Millennials are being set up for post age 70 retirements which goes along with decreasing population. If you don’t have a growing population work the one you have longer. If you work them longer there is less retirement to pay. In addition if nothing is done SS will suffer a 24% reduction in 2032 which is supposed to place it on actuarially sound footing to the end of the century. “Something” WILL be there, and it’s important to understand and optimize it.

Crypto Update

I run a portfolio of BTC:ETH which started in a 75:25 ratio. Over the course of the year the ratio has flattened to 55:45 as ETH had outperformed as an asset. My Y.O.Y of the entire portfolio has increased by 9x. YOY BTC is up 4x and ETH is up 16x. The combination of the 2 has proven to be invaluable in reducing my day to day volatility and improving my return. The crypto infrastructure continues to be built out and adoption continues, despite what passes for “news” (Elon Musk and his antics) which IMHO should totally be ignored. Out of a 2T market his stake is about 15B or 0.75%. It is not the tail on the dog but a flea on the tail that’s doing the wagging.

Crypto follows market cycles like anything else except the cycles tend to have an exponential component because the growth has an exponential component. Crypto seems to be taking a pause in growth. There were wild predictions this year BTC would reach 100K to 500K by the end of the year. This is of course the problem with exponential predictions. Humans are ill equipped to deal with exponential processes.

If you look at BTC growth since 2013 it’s undergone 4 cycles. Each cycles seems to be getting longer as the asset matures and different players, with different trading an investing goals, enter the space. The growth prospects of the space remain intact but the predictability of growth remains exponential. Many people feel like they were left in the dust at the recent explosion in value, but the market, like any market will let you in if you choose to participate. Both BTC and ETH have their growth tied to Metcalf’s law. As the number of wallets increase, the network value increases exponentially. ETH is about 3 years behind in terms of adoption compared to BTC, so ETH is responding to a shorter steeper growth as we see in the YOY above. BTC is going flat t o negative for a while, and it may be a good time to get in if you missed the runup. ETH remains in a strong bullish trend so probably not yet time to buy. BTC is at 43K today and may go as low as 30K so if you want in pick an amount and watch numbers for an entry point. ETH which is growing along a different path (# of wallets) will also eventually allow entry into the market.

I think something between a 50:50 allocation and a 75:25 allocation is what I would aim for. If BTC goes down, buy some, but not necessarily buy ETH. When ETH draws down, buy your stake in ETH in the ratio you have determined. In todays prices for a 50:50 ratio you 1 BTC for 43K and 13 ETH at 3.2K, for a total investment of 86K. Eventually there will be US ETF’s for BTC and ETH which will allow buy in same as buying QQQ or GLD.

Regarding BTC and energy. BTC is actually a greening influence. Suppose you build a wind farm that is capable of 100MW peak power but your needed distribution today is 20MW. 80MW of electricity is wasted. It is projected to be necessary in 15 years but today it is wasted. Suppose the cost of the wind farm is 100M financed over 5 years. If you use the excess power to mine BTC you payoff the wind farm in a year and reduce the cost to consumers over time as the mine continues to produce profit. BTC mining is geographically indifferent. It does not require a deposit to be mined it merely requires cheap power. Greenland has hugely underutilized hydro and thermal power and no way to effect transmission. Greenland is a preferred mining destination allowing water pressure to be turned into digital gold, improving the lives of the Greenlanders. Also BTC is mined on a decreasing function. The # of BTC is set to 21M and some where between 18M and 19M have already been mined. Once mined the coin does not need to be remined but has it’s own market based intrinsic value which allows possession and trading. This works like gold. Gold is a metal who’s lower limit vale is set by the energy and infrastructure required to get an OZ out of the ground. In 2020 mining cost was about $800 an OZ. What gives BTC it’s value growth above speculation is the upper 21M limit in # of coins. All of the tons of gold mined in the world have associated with it a bottom line energy cost and a relatively inelastic ability to increase supply. BTC has an even more inelastic ability to increase supply, only about 900 coins a day are allowed to be mined so energy costs are predictable.

Venmo Adds Crypto Wallet to Services

I just read Venmo has added a Crypto Wallet to their services. This would allow for very easy access for people to start to dabble in crypto. Minimum investment is as low as $1. My understanding is the product commences tomorrow. Venmo is a Paypal product and has 77 million users. I use Coinbase (COIN) which just IPO’d last week and has 54 million wallets in its network. 100 bucks a week x 52 = $5200 if it 10x that’s a nice chunk of change. You could buy your electric vehicle for $5200.

Here Come The RobinHoody’s

The RobinHood phenomena is a fascinating study in behavioral economics. The participants are practitioners, a few versed in trading but mostly versed in gaming and sports betting. They started by beating the dead horse called HERTZ skimming profits off dead cat bounces. Some gotta win, some gotta loose. They moved onto other vehicles and finally landed on GameStop a $4 stock currently trading for $155. The latest is DOGECOIN which is a crypto currency that has no purpose. BTC you can argue is pristine collateral. You can own it, lend it, and mortgage it. ETH is a unit of commerce. You can build a contract upon it, and once executed a precisely defined transfer of value occurs instantly, transparently and permanently. NFT’s allow you to tokenize things so you can own a stake. Let’s say India tokenizes the Taj Mahal. I could buy a token which would give me ownership in the Taj. I could trade and sell my stake or even leverage it using it as collateral. I could create a portfolio of tokens, correlated, non correlated etc. There are stable coins which are crypto’s that are pegged to something else often the dollar. Stable coins allow banking functions. They typically pay interest and can be used as payment. Stable coins offer portfolios of rate harvesting, like the old coots who used to switch their money between banks which offer the highest interest rate. That was back in the days when banks paid interest on deposits.

What does DOGECOIN do? People say it doesn’t do anything but I’ve been thinking about this and DOGE is a way to invest in pure volatility that is unregulated by the SEC. You can’t short DOGE. You can buy it and sell it, so there is nothing complicated about the transaction. You can’t hedge with options for example. It allows exponential growth. In FEB DOGE was worth 0.7 cents at it’s recent peak on April 19 it was worth 39.5 cents. The act of short term buying and selling and profit and loss is very much like playing a video game. There is major biochemistry involved. The reward and risk aversion circuits become the controlling variables, cortical processes need not apply. DOGE is an cross between a casino, sports betting and a video game played with real money.

I’m glad it exists. Personally I think it moves this kind of speculator out of BTC and ETH with some resultant loss in volatility in those assets.

Who Owns Your Money part 2

I’m interested in Macro economics. I’ve moved away from thinking about markets in determinate terms and more toward thinking of markets in behavioral terms. Deterministic markets are the ones upon which FIRE meme’s are built. Save 25x, leverage to greater than 4% return live off that for 30 years… Burma Shave. Save 25 x, leverage to 8% live 45 years… Burma Shave. The meme absolutely relies on a robust growing GDP over decades. In my research I stumbled across a S&P 500 return calculator. The Calculator calculates S&P returns bot nominal (without inflation factored) and real (with inflation factored) for a selectable time period.

S&P 500 return inflation adjusted since Dec 1999 (peak of the .com bubble aka beginning of tech wreck)

So the S&P over the last 21 years has returned 4.789% real. Slightly greater than the 4% leverage on a 30 year retirement, Winner Winner Chicken Dinner right? What if you’re leveraged for 45 years?

I next calculated from Oct 2007 (peak of the housing bubble) to Apr 2021 in real terms:

So in the last 14 years the S%P has returned 7.806% real. Oh Baby Oh Baby what’s the problem? We be reelin’ in the dough, stowin’ away the thyme!

The government controls money in 3 ways.

  1. Taxation
  2. Inflation
  3. Debasement

Most of the period between 2007 and today was under a relaxed Tax regimen. Inflation is important to a government because a non inflating economy is one that is contracting. Inflating economies encourage money spending, which boost GDP BUT money spending does not mean value expansion. A $5 loaf of bread is the same “value” as a 50 cent loaf. It provides your family equivalent # of calories. Inflation makes you want to buy that bread today before it goes to $6, and another unit of bread sold is + for GDP (which is in the toilet). Inflation taxes saving. Deflation OTOH causes saving. The 50 cent loaf may go to 40 cents so you wait till the last second to buy it hoping to save a dime. Deflation encourages saving and taxes spending.

Yea Yea Econ 101 right? What about debasement? Debasement is not inflation. It’s something separate. Ever wonder how the market could go back up so quickly while the economy was in the tank? The answer is debasement. The answer is in our reported numbers we missed a variable. Debasement is a divisor. I’m a Real Vision subscriber and was watching a video by Raul Pal and saw these charts:

This is a chart of the “dollar”. It’s essentially flat with a mean about .96 cents. The “dollar” is a ratio against other fiat currencies What that means everybody is debasing so relatively speaking against the world the dollar is stable and range bound. Bonds are similar. If interest goes too high say 2% the FED will force curve controls because the debt is so massive it can’t be refinanced at 3%, If rates go lower the government will simply print more money and turn it into debt so bonds are range bound and real rates are between basically zero and negative. IMHO bonds are dead as an investment. If you hold 40% bonds, your 40% is loosing money on a real basis. The government wants you to spend money. If you won’t buy bread, they will make it so your savings yield negative on a real basis. This means you loan them $100 and they send you $95 instead of $105 back in return. You effective get your pocket picked, which in some sense is spending money on a P&L sheet. Cash is the same or even worse.

So what about stocks?

This is a chart of the S&P 500 divided by the size of the FED balance sheet (FBS). The value of the FED balance sheet is the missing denominator. Since 2008 the FED has expanded the balance sheet and the ratio has essentially remained constant. You “think” the S&P is growing at 7.806% but in fact your 7.806% is being equally debased by the debt expansion (programs like QE and free money). If you aren’t making any money (flat curve) and you’re yanking 4%/yr out you’re going down. Gold/FBS is flat. Real Estate/FBS is flat. Commodities/FBS is flat. 2 asset classes have + growth crypto and QQQ.

Debasement represents a risk not counted in the FIRE meme. Inflation is barely counted as is SOR. The market is not roaring if the right hand giveth and the left taketh away. I own Q’s and I own crypto and I own cash. Using Q’s and crypto and cash you can balance the risk to give you net + growth. I also own creative destruction. I’m 69 and have at most 15 years left so my desire to “invest” is limited. I need enough money to deliver me into the grave and then leave my wife enough to carry her through. I’ve paid all my taxes on my fortune and hold my risk assets in Roth accounts except for a single IRA of about 400K which I treat as an annuity. I do owe taxes on crypto but I’m deep enough that it’s mostly LTCG. so as best I can I’ve minimized my tax relationship with ol’ Sammy. So that covers taxes. I own Q’s and crypto which covers debasement. I can’t see a case for inflation with 16M unemployed, technology, globalization and the fact the FBS is debasing at the rate of growth and geezers like me are retiring, in fact everybody is retiring. The baby boomer motor is broken. I read an article the help wanted signs are out but no one is responding. When rent is free and checks come in the mail not much incentive to show up to push the pencil or load the truck.

My analysis may be completely wrong, but you gotta ask yourself why are Gates and Buffet selling stock? Both subscribe to buy low, sell high. If they are selling….

Addendum: I was asked a Q how BTC covers debasement, a picture is worth a thousand words:

Compare this curve to the one above which compares the S&P to the FBS. Remember the chart graphs a ratio (actually the first derivative) of X/FBS where X is the asset class in question. The denominators are the same. This graph therefore gives you a relative way to judge rate of change of various assets. When X/FBS = 0 there is no growth. When X/FBS is – there is loss. When X/FBS is + there is growth and BTC/FBS shows not just growth but exponential growth. This is why a tiny bit of BTC covers a lot of debasement.

Who Owns Your Money

You own a 5M IRA. Who owns your money? You and Uncle Sam. If you RMD 5M at age 72, the RMD is $232,260. At 82 the RMD is $397,000. Let’s say SS at 72 is 57,700 of which 85% is taxable your net taxable income is $281,305 and your tax bill present day code is $49,708. So at 72 Uncle Sam owns 17.6% of your money. At 82 SS would be an inflation adjusted $67,603 so your net taxable is $454,463 and your tax bill is $104,631. Uncle Sam owns 23% of your money.

I’ve seen articles that claim overpaying taxes are a free loan to Uncle Sam, and somehow underpaying is a free loan from Uncle Sam to you, BUT who owns your money? Your money is jointly owned, PERIOD. Nobody “loans” anything to anyone. Your obligations are your obligations. Pretending your money is all yours is silly. If you underpay you will get fined. If you overpay you will get fined if you don’t pay on time and quarterly. I get fined every year because I pay as I go. I overpay slightly my initial major portions of my Roth conversions in the first week of Jan and pay the taxes by Apr 15, and then I overpay my final portion to push me to the top of the bracket in Dec once I know what my interest and distributions look like. Since I don’t pay quarterly I get a small fine every year which is fine by me since I like the ability to NOT do a Roth conversion if I choose like I did last year. Last year I sold some stocks before the crash and wanted to control my cap gains and bracket creep. I decided 2020 and probably 2021 (depending on the election outcome) would be the lowest cap gains I would ever see in my lifetime and since my money is owned by Uncle Sam AND me I wanted to give him as small a share as I could. Right now except for my BTC gains me and Sam are pretty square. I have less “money” but Sam doesn’t own much and going forward once Roth conversions are completed he will own even less.

My bet is in the future, as the body politic shamelessly and increasingly soaks the rich to redistribute wealth, I will emerge as already done been soaked, having paid my fair share at basement rates and moderately vaccinated from further soaking. My yearly taxable income stream will be dead center 2nd bracket middle class, which is a relatively protected class. Bracket 2 has a LOT of voters. Bracket 3 is when the soaking commences. It has far fewer voters.

Debt is majorly deflationary. The demographics are majorly deflationary. The long term GDP is deflationary. Unemployment is deflationary. If you count work force dropouts unemployment is at depression levels. Technology is deflationary. Yes I know bread and gas are up but the basket of goods and services is not, and the basket is the yardstick not a single item. In my opinion the government can’t tolerate inflation, even though they jawbone “running hot” because the debt needs to be refinanced every year, and inflation will force bond yields higher and the entire tax base will go to paying the interest on the debt. Paul Volker died in 2019 and as far as I know is still dead. BTC right now is anti-inflationary and anti-deflationary because it’s rising and tends to be uncorrelated or poorly correlated with anything. Interesting times.

Day Dreaming

The Bogglehead FIRE world is built around a narrative: Just DCA into “safe” “low cost” index funds every month and soon enough you’ll be rich, rich I tell ya!

WallStreetBets has a narrative: The little guy can form a formidable network and through network effects beat the Hedge funds and AI at their own game.

The real estate moguls have a narrative: Buy some property, rent it out, use the proceeds to buy more and build a perpetual money machine.

Each has it nuisance in risk, profitability, and likelihood of success. Each has its ship wrecked on the rocks scenario. If you’re invested in these you should be able to quote chapter and verse the pro’s and con’s. Crypto OTOH has one narrative: “It’s funny money! It’s going to zero!” I believe this to be a false narrative. The likelihood of crypto being funny money is silly. I can sell a single BTC today and walk away with $57,525.83 dollars in cash. If BTC is funny money $100 bills are funny money. The idea it’s going to zero is also about zero. I bought some in 2015 and that BTC has ALWAYS been 400% profitable (5x my money) even after the 2018 crash. I saw a +_ 45% volatility in 2018 BUT NOT a goose egg. BTC remains volatile but not nearly as volatile as 2018. The solution to eating a ghost pepper is to eat at most a tiny bit. The solution to owning Crypto is to buy a tiny bit. The videos below, average 3 models so I’ll use the model averages To retire to the Caymans in 2030 on the average inflation adjusted income of $7322/mo, using the average model requires you own 2.14 BTC today or a 123K investment. If you go all ETH using the same average modeling process, 54 ETH or 104K investment is required. I would buy 92.25K of BTC (.75*123K) and 26K (.25*104K) of ETH (118.25K total investment) for a tangent portfolio yielding the greatest return for the least risk. The models take into account a 3% inflation rate.

I was cruising YOUTUBE and came across a couple FIRE Crypto projection narratives. Very well done and good for a Sunday evening speculation. It takes surprisingly little money to enter the projected Crypto exponential growth narrative.

I own both BTC and ETH such that for every $100 of total crypto I own, $75 is BTC and $25 is ETH. I read a study that the efficient frontier tangent portfolio of BTC:ETH is this ratio. In the past year this ratio has proven to be roughly correct oscillating between 70:30 and 80:20 but then revising back to a mean of 75:25. Here is a list of correlations:

BTC SPX VIX $USD GOLD 10Y TIP ETH XRP LiteCoin BTC Cash

1 0.10 -0.2 0.03 -0.09 -0.09 .55 .07 .75 .53

ETH BTC SPX VIX $USD GOLD 10Y TIP ETH XRP Litecoin BTC Cash

1 .55 0.18 -0.33 0.11 -0.26 -0.03 1 0.10 0.70 0.33

You can see how both BTC and ETH serve to provide added diversity to a portfolio, and to each other. (Above data taken from Hedgeye Crypto Quant newsletter 2/18/2021).

Have fun day dreaming!

What the Cold Snap Tells Me

It got cold, except where I live. The power grid almost failed to completely failed in many places. It takes between 50kw and 100kw to charge a Tesla. If you have 2 cars that’s between 100kw and 200kw. What makes anyone think our power grid cam handle electric vehicles PLUS the power needed to supply a home? If the country is going green, buy copper, buy Lithium, buy Rare Earth metals, buy Uranium.

WallStreetBets

I’ve been thinking about the GameStop Robinhood thing. The narrative is a bunch of kids got together and jammed the GameStop shorts which were short 140% of the stock float. Every short by definition is a levered bet since you are basically borrowing a share at some future price that is lower than today’s price. You are selling something you don’t own. Someone has to own a share that you can borrow as collateral. You pay to borrow that share and that’s called margin.

The average console gamer is a 40 year old professional male with 3 kids. He is not a pimply faced 17 year old. Think about that. The average game is an algorithm. Gamers spend their time whacking on the algorithm trying to figure out its idiosyncrasies and vulnerabilities. Another name for algorithms is artificial intelligence, so gamers go up against AI every day. Yesterday I was watching a youtube vid of someone in a combat flight simulator going up against 7 Mig 29’s against a single F 15C Eagle. This is a perfect example of taking on an AI

WallStreetBets is a kind of wet ware AI made up pf 3 million nodes (traders) The network complexity and power exists according to Metcalf’s law which states essentially as the number of nodes increases linearly the number of connections increases exponentially and hence the network has much more power from an information point of view than the linear increase. Think of a square with side A. The area is A^2 and hence a small change in A works to be a big change in area.

I was reading about max entropy (also known as heat death). It was in relation to a new piece of evidence against dark matter, which means when the universe reaches max entropy it won’t contract and start anew it will suffer heat death. Entropy has one property. In a system it either stays constant or grows, it never shrinks. Entropy is the reason Covid doesn’t die. It is the driver of the infection and the infection will continue until entropy stops increasing.

It occurs to me the WallStreetBets coup is merely the addition of Metcalf’s law and max entropy. A bunch of gamers using individual computers started betting against an anomaly aka 140% of leverage, using call option leverage. 3M decentralized nodes randomly started hammering on a poorly thought out (from a risk management perspective because of the overleverage, and through the random increase in entropy caused the Bayesain probabilities to explode in the favor of the 3M for a time and then the collapse resulted in a further increase in entropy to the accounts of the 3M (or whatever % continued to hold the trade). It’s an interesting speculation and I think closer than the notion a bunch of 15 year olds brought down Citadel. The reason the F15 won was it’s design AND pilot gave it a high probability of success.