The First Shoe Drops

On Monday Janet Yellen convened the President’s Working Group on Financial Markets, with an agenda item to “regulate stable coins with a quickness”. On Tuesday Blockfi received a cease and desist order from the NJ state AG’s office. NJ’s jurisdiction only applies to NJ but the way the law is written “securities fraud” is prosecuted per case meaning if there are 1000 Blockfi customers in NJ there are 1000 lawsuits. It appears the government is going to consider interest bearing stable coin sales as sales of unregistered securities. This may blow a hole in DeFi projects. Staking protocols while they pay rewards for allowing the use of the token to validate the block chain are a different thing. I haven’t participated in any DeFi projects because to me they represent direct competition to banks and you know banks are going to push back. Yellen made 7M in doing speeches before banks in the 2 years between her FED gig and her Treasury gig.

The staking tokens has a different issue. It turns out when “property “is created de novo it is not taxed until it’s sold. Lets say you grow corn. Basically you plant seeds, add sun and rain and come the end of the season you have corn. You then sell your corn and either make a profit or take a loss. The corn becomes taxable upon sale. I recently bought some DOT and decided I like ADA better so I converted my DOT to ADA but the conversion was 2 step from a tax perspective. 1. DOT cash and 2. cash to ADA. It works just like a stock purchase, you buy a stock at a specific basis and sell it at a profit or loss. If profit pay the tax, if loss bank the loss against future profits. My sale generated a small short term capital loss.

I’m staking Ethereum. My stake helps validate the network and that validation pays me “5% rewards”. I get paid in Ethereum. All of the Ethereum I get is brand new and never existed before, just like a farmers corn is brand new corn. In 2014 the IRS determined crypto was property. I just presumed my “stake rewards” would be treated as ordinary income like interest income and taxed yearly, but the way the law is written, if I don’t make a sale, I don’t generate a capital profit or loss, which is what gets taxed. This means I can hold my newly generate ETH for > 1 year and turn a short term event into a long term event. If the market is going up my newly minted reward goes up without being taxed until I sell it. Eventually upon sale the government gets it’s due.

A lawsuit was filed in TN Federal court to determine the tax implications of staking. It provides an interesting wrinkle. Basically one could ladder “rewards”. Lets say I stake 100 ETH. This would throw off 5 ETH/yr. I would then stake that 5 ETH which would throw off 5.25 ETH. 110.25 throws off 5.5125 for a total of 115.7625 total ETH and so forth. 1 year and a day after the first 5 ETH get thrown off they become LT cap gain eligible. In 3 years your ETH has increased 15% with no taxable event and no additional funding. Of course if ETH goes from $2K to $20K those 5 coins go from $10K to $100K in value.

I’m steering away from stable coins right now. Blockfi is a monster player and will likely fight this “ruling” in NJ since their business model is to trade in DeFi. DeFi will be a world wide market and the rules in NJ will not be the last word in this. I haven’t decided about doing more staking. I need to further research the implications. So many rabbit holes, so much complexity, so little time. If you don’t attempt to own the complexity, in the end it will own you. You can’t jut stick your head in the sand with a 60/40 portfolio and a 25x 4% rule.

Retirement and DeFi

So much of FIRE blogoland is devoted to “passive income”. Often the passive income isn’t so passive. You write a blog and grow it into an “income stream” but you’re stuck writing and marketing the blog. You buy some duplexes and are stuck with the tedium of running a rental business. You sell Herbalife and loose all your friends because when they see you coming they head the other way. Maybe you buy preferred stocks or dividend stocks. Maybe you buy an annuity. In days gone by when you could lend some money and get paid some interest, you bought CD’s lived off the interest, or you started a rock band and made and sold CD’s

In retirement the goal is adequate income. It’s a different portfolio goal than what you did during the working years. During the working years your risks were covered by your work and your employer. During the retired years your risk is covered by SS and your portfolio. In my Grandfather’s day he was covered by SS, a pension, and interest from a CD ladder. When my grandmother died at 88 she had about 60K in assets left to her name. My Great Aunt (same generation as Granny) who died at 90 had maybe only 30K left beyond SS. In my now 91 year old Mom’s case she has IRA, annuity and SS income and a fairly robust portfolio. I recently had to move Mom into assisted living and her portfolio readily pays for that though she is slightly cash flow negative she has more than enough to live 2 more decades. Granny lived in their retirement house and would not have been able to hack assisted living, financially unassisted. Auntie and her husband FIRED in the 1960’s. The bought a resort property on Lake Michigan and rented cabins half the year and then lived in a trailer in FL half the year. At some point they sold the resort and moved full time to the trailer. No way could Auntie afford anything more than the trailer.

This is a picture of 3 retirements over 120 years of life. Granny was greatest generation pension based retiree at 65. Auntie was greatest generation entrepreneurial based FIRE retiree. Mom is silent generation investment based retire at 67. I’m boomer generation investment based retire at 66. Each of these have generational approaches to retirement which used the instruments of their time like fixed income v annuity v pension income to in at least 2 cases just barely realize the goal of not running out of money before running out of breath. Every family has this generationally historical approach to the dilemma of retirement using the tools available to the generation. Greatest generation had little access to stocks, some access to bonds and debt instruments and some access to real estate. Stocks were typically too expensive to own in small quantities, unlike today. The modern brokerage account has been around less than 20 years. I’m a boomer and extremely dependent on the financialization and government intervention of the investing environment. My children are Gen Z. To them investing will be the result of the creative destruction of decentralization and digitalization.

Each of my parents and grand parents failed to embrace the next generation’s style, preferring rather to embrace the relative “comfort” of their generations investing style, a style that petered out as each generation petered out. That’s the conclusion I reach. Investing styles are marketed. As a generation embraces it’s marketed style that style reaches a peak and then dies off as the generation dies off. If you want to beat the odds, you must embrace the style of the 3 younger generations ahead of you at some level elsewise your money may peter out before you peter out. It’s clear this means you need to develop some intimacy with crypto before your generations style, what ever generation that is, becomes anachronistic. This is especially true if you belong to the bogglehead version of reality. There is no place in boggle head lore for crypto. It is anything BUT a cheap diversified index fund. Boggle head lore is Gen X’s generational investing style. Nothing more, nothing less. It will see it’s zenith same as every other generation’s style and then will be left to decay in the scrap heap of time while the adherents skid to their eventual demise.

If you can, take some time to analyze the strategies of the previous generations in your family and their efficiency and effectiveness, and analyze in the context of the financial regimen of their generation. In 1980 Vanguard was dinky and had 1 or 2 funds. Fidelity was huge and sold loaded funds but sold the funds at a discount compared to companies like American Funds. Most of Fidelity funds were 3% load and American was 5.25%, they were all offered through some kind of local broker (salesman) who got his cut as well. The model was a bunch of small shops selling product instead of the internet based digital marketplace of today. Marketing gimmicks were employed like FDIC insurance. FDIC is great for a single bank failure. Do you think it really protects you against the FED’s moral hazard?

I’ve started playing around in some small measure with the products which will constitute what is being marketed to my kids. In no small measure they are throwback to Grandma’s generation. I’m staking Ethereum and it pays me interest in Ethereum. The amount I make in dollars is dependent on the Ethereum price. It is effectively a bond, but a intermediate term bond that pays 5% interest. It has volatility as well. At today’s Ethereum prices I make about $16/day. If Ethereum doubles I’ll make $32. $16/day pretty much pays my utility, cable and cell phone bill. If I owned USD coin, I could lend it at a fixed 4% rate. The terms cover the value of the principal, in other words my USD coin is backed up dollar for dollar. This works the way gold did back in the early 1900’s when you could exchange your dollars for gold at a fixed rate. USD coin exchanges 1:1, coins:dollars. What passbook account pays 4% interest? This means if I own 100K in USD coin as emergency fund money I can make 4K/yr or $11 per day, every day. Pretty much pays for our food. When my SS kicks in full force next year it will pay us $146/day tax free based on the tax bracket we will be in at that time. So let me see 146 + 11 + 16 = $173/day, every day ($1211/wk, 62,972/yr) . Eventually when my bride turns 66 and 10 months $146/day will become $171/day for a total of $198/day passive income assuming Ethereum doesn’t increase in price. My investment was about 5.5K on the Ethereum at about $100/coin in March of 2020 and if I owned it, $100K of the USD stable coin (I presently don’t own any) virtually tax free because SS is taxed at 85% leaving 15% of the SS money to passively cover taxes. If I bought the Ethereum at todays prices it would still be only about a $220K total investment. My SS is high because I spent so much of my 35 years paying into the trust at the highest amount, and I’m not claiming till I hit 70. I also understand how to maximize my wife’s benefit. Our SS has built in inflation adjustment. This money machine runs itself, no tenants, no blog posts, no orders to Herbalife and my friends generally don’t run the other way when they see me. Eventually the Ethereum stake will go away and I’ll have to figure something else out. By then the Gen Z-ers will be in their prime and the Gen-Apha will be breathing down their necks. I’ll likely be dead by then but my wife, she has a 30% chance of 30 more years and I’ll do my best to see she is funded come hell or high water.

This is a true granular view of how to think about passive retirement income. It starts with understanding the historical, and considers what is generationally marketed, trying to avoid the generational myopia that causes, and looks forward to the future. It’s hard to run a bunch of duplexes if you happen to stroke out or get Parkinson’s. It also limits greed. It’s less about trips to Europe and more about daily bread forever. The Gen-X 4% narrative is simplistic and requires perfect execution of the assumptions, because it’s a mean reversion strategy.

Where Is Inflation in Your Life?

Everybody’s freaked out about inflation. What if this is the 1970’s!!!!!! Everybody has their eyes glued to the CPI. The CPI is the wrong thing to look at. The CPI is the wool being pulled over your eyes. It is a narrowly defined government number designed to deceive. If you wonder where inflation is simply look at the stock market.

The FED has been expanding their balance sheet basically this whole time. You can see the little downward dribble in Q3 2018, this was when the FED’s QT program begun in 2015 and accelerated in 2017 forced the repo market to become illiquid causing over night lending rates between banks to sky rocket to 10%. Since that time QE has been restored and the market steadily rises. What happens if you divide the S&P by the size of the FED’s balance sheet?

Growth is essentially a flat line dating back to the GFC (actually much longer). In real terms using CPI as the deflator (denominator), the market has seen a 9.7 annual rate of return since June 2008. Happy days are here again!

Yet using the FED balance sheet as the deflator growth is flat aka deflationary since long term growth is 3%. So what is it? Are we growing or are we living in a CPI tainted illusion? It’s very much politically in the government’s favor to paint everything in the CPI illusion. It makes everybody who own assets to feel rich. It also allows the government (and loan holders) to pay their debt in cheaper debased dollars/ But what if you’re not a loan holder? What if you’re some retired guy who Dave Ramsey’d your debt decades ago and live on proceeds from “fixed pile” since you are no longer employed? My grandparents were retired in the 70’s and lived off a largely fixed income bond and CD (non equity) strategy. Because of a fixed income lifestyle the 70’s caused the invention of the early bird special. On Friday or Saturday as a retiree you could have the illusion of going out to eat and still not blow the budget. It was sensible commerce since if there wasn’t an early bird special, those meals served would have been lost. It’s a dilemma. When you are working it’s the work that pays the bills and wealth increases, but in retirement it’s the pile that pays the bills and as can be seen from the above graph REAL real wealth is flat.

If you read Bernstein, the REAL way to retire is to have enough money to cover your expenses for the # of years you expect to live taking into account inflation. It’s not living 30 years on 25 years worth of money inflation adjusted. It’s not living 45 years on 33 years worth of money inflation adjusted. According to the above graph 9.7% market return just keeps your nest egg even given the FED balance sheet deflator. If you intend to pull out 4%/yr you would need 13.7% return to keep your nest egg even. The alternative is to die soon after you retire before the FED can debase your nest egg into fairy dust.

Retiree’s these days no longer live in a fixed income environment but have moved out on the risk curve into the land of FED caused bubbles. It’s like living on an avalanche. Consider the 2020 dip in the SP v FED sheet. Consider 45% of all new debt in history occurred since that 2020 dip.

Cardano

Cardano is the 5th largest crypto by market cap. I’ve been studying what are called “Alt-Coins” to understand how these crypto projects work. Crypto can be looked at like products. These products provide different capabilities and utility to different users. In the recent adoption of BTC as legal tender in El Salvador, BTC provides a secure, decentralized, instant, permanent means of transfer of value between 2 parties. Those properties are provided by the energy used to “mine” the cryptography of the ledger”. If I work in the US and make $1000 to send to my family back in El Salvador, and the price of BTC is say $30K, I deposit my $1000 into my BTC wallet, buy 1/30 of a BTC which on my exchange costs $2.99, hit send to say my wife’s wallet and she receives 1/30 of a BTC back in El Salvador. She can then sell the BTC and turn it into the dollar pegged Salvadorian Colon, or she now can just spend the BTC to buy gas and groceries. OH the volatility! BTC is volatile but not so volatile that you can’t react to a text message at 4pm on a Friday that the remittance is coming and to be ready to convert BTC to Colon or to some stable coin like the USDC which is pegged to the dollar also. Your $1000 is dollar denominated, the Colon is dollar pegged and you can send remittance whenever you like, so you can choose to send during a period of low volatility. 23% of the Salvadorian GDP is remittance and this affects about 360K households, so the cost and efficiency of transfer is not trivial. Western Union charges $47 and is not virtually instant. In addition El Salvador has volcanic power to burn, which is actually going to waste as I write this and that energy can be used to create the security of the network at a profit to the country and it’s citizens. BTC is a good product for El Salvador’s market needs. It stores value and allows secure commerce at rock bottom prices without any 3rd party entity involvement. Because BTC is declared legal does not mean other crypto’s convertible to BTC are not available to El Salvadorians, like stable coins, Ethereum Cardano etc.

Stable coins are a means to store value apart from volatility. If you turn $1000 of BTC into USDC it’s value will remain stable at $1000. Some stable coins offer interest up to 12.68%. The higher the interest the greater the risk. Interest is offered to increase the liquidity of a project. It works the same as the Feds Repo system. Banks offer short term loans to each other in order to collateralize commerce. The loans are typically settled each night. When they are not settled we have Bear Sterns and Lehman Brothers. We have the liquidity crisis of Sept 2019, we have daily injection of billions of dollars of liquidity by the FED to keep interest rates in a range. If those loans become illiquid the interest rises to level in the range of 12%, so the American economy is no less risky and volatile than Crypto. it’s just the FED literally papers over the issue with dollar bills every night. The point is stable coins act as a bank for the unbanked and un-bankable. They are designed to allow people to do banking chores without tellers. The thing that first got me into crypto was a story about a multi millionaire who was vacationing in the Greek Islands in 2015. Greek banks froze up and Greece became illiquid. Withdrawals were limited to $50/day and you had to wait in line all day to get your $50. Checks could not be cashed. Credit cards were not recognized. The guy couldn’t get a plane ticket home and was stuck, but he had BTC and with BTC he could buy Ouzo, Gyros and a plane ticket home. BTC is fully backed in terms of it’s store of value and trust. It relies on the mining and not some bank’s word the liquidity exists. 2 weeks later I started buying BTC and 3 weeks later I started mining crypto. Mining crypto turned out to be more hassle than I was willing to endure. At that time a transition is mining was occurring between using old computers and making high power video boards into multi thread processors by using software to multiply computing power, what is called #hashrate. It was fun to get a miner going, even though briefly. BTC mining became an arms race of specialized machines created specifically for their task, the way a rail dragster is designed specifically for it’s task. You don’t drive a rail dragster to the 7-11 to pick up some milk, and you could no longer use an old laptop to mine BTC. The BTC mining protocol is called proof of work.

Another protocol exists called proof of stake. Proof of stake provides liquidity by having “coin owners” offer their coins to provide liquidity and trust to the network. Effectively they “stake” the network. In the PoW model energy and #hashrate is what “stakes” the network. Ethereum started as a proof of work network but is converting to a proof of stake network. People are paid to stake a network. I decided to give Ethereum staking a try. I store my Ethereum on Coinbase which is a publicly traded company multibillion company so I figured their incentive to steal my Ethereum was low. Their “fee” for allowing me to be part of the stake pool is pretty high so they make money off my staking, a further incentive to play by the rules. Pretty much it works out for every 4 Ethereum that is paid for my stake, they get 1 and I get 3. I could become a private staker with as little as 32 ETH to stake and make all 4 coins, but with Coinbase I’ll get a 1099 MISC to file with my taxes and all of my accounting will be up and up. I have zero interest in an audit. Over time as the staking project progresses I’ll be passively adding Ethereum to my account. Staking Ethereum does require you lock up your ETH making it unavailable to trade, but I’m buying and holding anyway. I staked about half of my ETH to see how this works as a source of income and my return is about 6%.

I’ve also been investing in a token called Cardano. I think Cardano has the possibility to become very big. It was written as a proof of stake protocol from day 1 and it’s staking mechanism is different than ETH. Cardano uses staking pools, where groups come together, put up their Cardano, get paid and then get to have their own “rules” about pie distribution. Effectively this makes each staking pool a small business, and all of these small businesses are in competition. This forces the cost down through competition while maintaining a high degree of security since the “coins” never leave your custody, so no one can steal them. The pool acts as an entity like a fist is made of 5 fingers. Efficiency is created by economy of scale and competition. Staking rewards are in the 5-6% range as well. Unlike the ETH model the stake can be un-staked at any time. Un-staking simply means your pool looses your share of the capital and you loose the income.

Cardano is targeting the third world. BTC and ETH are pretty much first world inventions. Imagine African villages that create a stake pool. This effectively gives each stake holder a bank account that pays 5% interest. It also gives each stake holder an identity. Right now it’s virtually impossible in Africa to prove who you are when it comes to commerce. If you go to a bank for a loan interest rates are 85%. If you are on the blockchain your worth is guaranteed by the chain and you can engage in commerce. In the country of Georgia educational credentials will be included on the Cardano block chain. Right now you can go to the Middle East and buy MBA credentials for $250, but those credentials are not guaranteed. Georgian credentials ARE guaranteed and as such therefore your identity is guaranteed. Several African countries are adopting Cardano. Ethiopia, Tanzania, Mongolia and others. As Cardano is adopted, the means of trusted cheap inter country commerce is adopted. If I make sandals in Ethiopia and you sell sandals in Tanzania we can do business peer to peer. Cardano uses a programming language called Haskell and therefore smart contracts can be created. When commodities are traded they are created essentially with smart contracts. When you buy corn, what you purchase is standard 5000 bushel contract of the grain of a specific quality and the price is determined by how closely your product matches the standard contract. In the case of sandals, payment can be predicated on a smart contract which includes quality and logistics. Meet the terms of the contract payment is guaranteed. This will transform Africa, and eastern block nations.

There is much more about Cardano to understand, but consider Musk has satellites all over the sky with his low earth orbit project Starlink. In the late 70’s I was involved in a low earth orbit satellite project for amateur radio. A satellite was piggy backed on a space launch and could be contacted by very rudimentary equipment. I made a beam antenna out of a broom stick and 12 ga copper wire and was able to contact other operators beaming the satellite. This same system can be used with the Starlink satellites except Starlink will top out at 42,000 satellites. This means every few minutes a new satellite appears on the horizon giving essentially continuous internet connectivity. Effectively instead of you going to a new cell on the network as you drive, a new cell pops into view as you stay stationary. This gives Africa internet without wires or towers. Ever wonder what happened to that iPhone 6 you traded in? It’s living in Ethiopia in someone’s pocket. I live in the shadow of NASA and we launch at least 4 rockets a month with satellites. I checked and I could sign up for Starlink internet coverage to my home today. This is happening, and an international block chain based currency is just the ticket to explode commerce in the 3rd world. If you look at demographics it’s emerging markets that have all the kids and therefore will experience all the growth. Kids are not afraid of technology or crypto and will use those tools to sculpt their world. Once in Hong Kong I went to a 10 story building which was a “computer market”. It was floor after floor of booths and surrounding the booths were kids and toothless old grandpas. They were buying mice and motherboards and power supplies. There wasn’t a Dell or HP within 1000 miles. It was raw commerce being built from the ground up and it was an explosion. If Cardano can standardize in the 3rd world the same thing will happen. Cardano is yet to become fully operational. It is undergoing a rigorous testing regimen. Over 100 peer reviewed academic papers have been published on this project making it the most researched project in history. The expected time to go live is September which is why I’m writing about this. Gen 1 was BTC. Gen 2 Ethereum. I think Cardano has a high probability given its market cap to become the Gen 3 standard. If you missed 1 and 2 you might consider risking some funds on 3. Crypto growth is best characterized by Metcalf’s law which basically says a network’s worth is a function of its exponential complexity. This is what drives the asymmetric growth. The independent variable of complexity is # of wallet addresses. 1st there is BTC. Ethereum lags BTC in terms of address growth by 3 years. Cardano is slated to add 1 million new African address soon.

If you go back to my days as a BTC miner, what put me out of business? It was greed. Greed forced the end result of ever more powerful and specialized miners. I’ll let you consider that motivation and it’s risk.

The Hypocrisy of Musk

Musk is rich. Musk is a techie. Therefore Musk must know about crypto, Right? Musk builds “green cars” filled with power hungry batteries. Musk’s cars are worthless without electricity. To recharge a Musk “green car” model S requires 100KW of power and must be on a 50 amp, 240V circuit, the same as a clothes dryer or electric range. A BTC ASIC mining box uses 3.1KW of power and uses a 12 amp circuit at 240V. To recharge either a Musk car or mine a portion of a BTC uses the same energy provided by whatever utility is connected to the wire. If your utility is coal fired, your Musk car uses dirty energy to get you down the road and therefore YOU are complicit according to Musk’s standards. You may or may not be “green” yet you are hailed as a saint, saving the planet. If you mine BTC using the same coal fired power plant you are marked as a villain by the media.

A clothes dryer uses between 3KW and 5KW of power. If you do your laundry, and your utility uses a coal fired plant, you are equal to the pollution caused by the ASIC miner. Are you a villain? How many homes own an electric dryer? Are all your neighbors villains? How much power is required to build a Musk car, from the creation of the batteries, to the creation of the motors, to the mining of the copper and other ores involved, the rubber, the plastics, the production facility, the energy consumed by the workers coming and going to work? How much of that energy is “green”? What about the transmission lines between the Gigafactory and the utility. What was the energy cost of mining that copper, aluminum and steel.

Tell me again how BTC is a dirty technology, but Musk, one of the richest men in the world and Tesla is green. What makes BTC a “dirty” technology is it is a highly efficient decentralized technology and therefore anybody with the skillset can become a miner, and that makes people jealous. Mining is a marginal business and so anything you can do to increase the margin between cost and price, defines profit. This is why BTC mining often is done using energy that is abundantly in excess such as hydro-power or geothermal. Unlike gold mining. which requires you to rip up the earth at a specific location, BTC mining can be done virtually anywhere abundant excess power exists. Excess power otherwise wasted is turned into marginal wealth. Seems like a pretty good deal to me.

Next time you hear some blow dried “reporter” quacking about dirty crypto, you might consider a blow dryer consumes about 1000W.

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.