For the past couple of centuries technology empowered the state, put more things under its control. They have ultimate custody of all your financial assets, and custody is nine-tenths of the law. You simply can't hold $1M in financial assets in a form where 'The Man' can't grab it if he finds you an enemy of the state, which in many states includes righteous men.
But like so many things the effect is not linear, in that now technology is putting power back in individuals. We can now take classes online, and be evaluated objectively via tests, making Universities less important. We no longer have a handful of news sources, but a spectrum that allows us to choose among vastly different interpretations of the same data. And we have digital currencies, which exploit cryptography innovations aligned with processing power to create ways of assigning credits more efficiently than fiat currency.
The essence of money is not that it is backed by something intrinsically valuable we can hold. Once we severed its link to gold and silver, it still 'worked.' I would not have predicted that in 1900. Money works because people accept it, and the large network effects of everyone accepting it make it indispensable, because it avoids the 'double coincidence of wants.' Bitcoin was created by geeks who were incented to invest their technical skills into mining and developing the network, and as these highly productive people began to accumulate these assets, they appreciate its value. Since highly productive people appreciate these assets, they are valuable because they can be translated into purchasing the services of such people. Thus, initial coin offerings (ICOs) allow people to fund new businesses focused on blockchain technology because the same people creating these businesses are fine with getting paid in 'tokens', something that would be hard to convince for your average person.
Long term, I see much wealth going off the fiat grid into cryptocurrencies, because as we've seen throughout history, governments eventually run out of other people's money, leaving only expropriation via inflation or outright takings (see 'Fragile by Design'). Anticipating this, getting your money into something the government can't seize is important, and cryptocurrencies allow you to do this. If a government tries to prohibit bitcoin, those with large bitcoin accounts will simply move to someplace that accepts it, like Singapore, and a country filled with those who appreciate and have a lot of bitcoin will tend to prosper. So unless the world governments can enforce a worldwide compact with over a hundred players, bitcoin will succeed, and I'm sure most smart countries will ultimately allow general digital currency use reluctantly, to avoid such a brain drain.
While I love Bitcoin, Ethereum is better because it builds contracts into the same blockchain, which creates greater functionality. If you go to Reddit, you'll see more development in 'Go', a cutting edge software language, in Ethereum projects, and there are already more wikis on GitHub for Ethereum projects than Bitcoin projects, so I'm confident that Ethereum will surpass Bitcoin in market cap someday, especially once they move to proof-of-stake (sometime next year).
Since 2014, one has been able to put Bitcoin into IRAs (see here), though IRAs are so highly regulated, finding how to do this is non-trivial. So I thought I would move some of my 401k into cyber currencies such as Ethereum (you can do BTC too, but I'll use ETH as the example). Most 401ks and IRAs do not allow you to do this directly, and BitcoinIRA charges 10% to set up a Bitcoin IRA. I don't blame them for charging this much, as it's difficult, and as there's an 80% premium to NAV with the Bitcoin Investment Trust (GBTC), investors are clearly willing to pay extra to avoid the complexities involved in directly owning them (eg, try to explain this to your parents).
The problem is that no IRA custodian can translate USD into ETH the way they can move your USD into a mutual fund. You have set up an account at a cybercurrency exchange to do that, and most exchanges do not handle IRA transactions. The new regulated bitcoin exchanges have very small staffs relative to the number of customers, and so have automated most of their support function. Thus, if you have a question ('how can I buy BTC for my IRA on your exchange?'), you'll get an auto-bot answer using an algorithm that finds the best fit your keywords. These are irrelevant to unorthodox questions, and follow up questions just lead to more pointless autobot answers.
The humans, alas, are rarely better, basically doing the same thing with their meat-based neural nets by looking at their FAQs and copy and pasting answers from there. At Coinbase, if you follow up your question after not hearing anything for 3 days, they will assume you have changed your question, so it moves it to the back of their queue. Thus I had an issue where my question was never answered because every couple of days I would write, 'is anyone there?' which would put me back at the bottom of the queue, and my question was thus unanswered (and funds frozen) for 3 weeks.
It took me a while to find the companies that allow this directly. It's not straightforward, however, as Kingdom Trust clearly stumbled into this capability, and they gave me a bunch of contradictory information, all standard confusion. I'm sure they and others will figure this all out eventually, but by the time it becomes easy to invest in digital currencies, the incentive will be a lot lower. So, be patient, it will happen, but just about every step takes at least a day.
Here's how you set up a cybercurrency IRA:
1) Go to Kingdom Trust, an IRA custodian based in Kentucky. Rollover your IRA/401k there, informing them you plan to hold ETH or BTC in your IRA.
2) Set up an account at Genesis (not Gemini). You will need a clear picture of your driver's license you can email them, and a digital photo of a recent utility bill (w/in 3 months).
3) Once approved at Genesis, you to open a BitGo account, as this exchange stores your initial wallet after the Genesis trade.
4) Ask Kingdom Trust for an "Investment Directive For Digital Currency" form.
5) Once you have this form, request a trade at Genesis, so that if you have $100K USD, ask them to buy as much as possible with that (it's called RFQ--request for quote--on the Genesis portal). You will get back a confirmation with the amount of USD paid for X units of ETH. You then 'accept' that on the Genesis site.
6) You then immediately fill out the Kingdom Trust "Investment Directive" form, which includes wire instructions to send your IRA money to Genesis's bank account at Silvergate Bank (see here), and your trade terms from Genesis, which includes how many ETHs were bought and for what USD price. You will need to sign the Kingdom Trust Investment Directive digitally, so add the PDF plug-in that allows digital signatures. Do this early in the morning, as even then it takes a day for them to instantiate the wire.
7) Kingdom Trust then gives you a wallet address from your BitGo account. You then go your Genesis portal and click on your earlier RFQ trade. Click on the blue box to the left of this, and under Buyer Actions put in the ETH address that Kingdom Trust gives you. Send your ETH to the BitGo wallet address Kingdom Trust gives you.
For Bitcoin, this is ultimately put into a multi-sig wallet. For ethereum, they do not have this capability yet but are working on it, so your money stays at an address at BitGo under Kingdom Trust's control. After that, Genesis is basically out of the picture.
Fees: Genesis charges 1.5% for their service, which is implicit in the price paid relative to the market price. You have to pay Kingdom Trust $50 to open the account, $40 for the wire, and a $250 annual fee.
It should be mentioned that while getting off the grid is one of the reasons cryptos will do well in the future, your crypto holdings within an IRA are all on the grid.
I don't think cryptocurrencies are any silver bullet, they just offer a different set of exchange medium and value storage trade-offs vs. fiat, gold etc. Like collecting high-end art, this may or may not work for you.ReplyDelete
As with fiat, at some level you have to TRUST that the entity holding your "wallet" won't screw you or that the "central bankers" don't initiate some hard fork that goes horribly wrong. "Cold storage" Bitcoin sounds an awful lot like gold in your basement.
Also, blockchain tech is cool but I don't see how a system that needs to update millions of records all over the world every time you buy a cup of coffee is very scaleable. It might be better for equally critical record keeping with much lower transaction volumes like real estate titles or other records. There are plenty of places in the world where wealth creation is being held back by lack of property rights infrastructure/systems/culture. In fact, I think Hernando de Soto himself is involved in this somehow.
Ethereum will improve its scalability when it goes to proof-of-stake. Iota is a new cryptocurrency that is infinitely scalable as it uses a 'tangle' mechanism as opposed the blockchain. One can imagine Iota being a side-chain exchangeable into ETH or BTC, allowing lots of micro-transactions that would be infeasible in these base systems.ReplyDelete
Dr Falkenstein, happy to see you're blogging again. It seems to me that IRA helps to reduce tax, but does not help from ownership angle. If your concern is that "custody is nine-tenths of the law", cryptocurrency in IRA can be seized by a court just as easily as a mutual fund or stock investments in an IRA. Is there a way to keep the custody of cryptocurrency yourself and enjoy the tax delay of an IRA account?ReplyDelete
Custody and anonymity will fuel demand for cryptos, which along with their ease of use (you can send $1MM in 5 minutes), make them superior to fiat currency holdings. The IRA holdings then just piggy-backing the returns. Given you shouldn't take your IRA holding out prior to 65 or so, might as well get some of that price appreciation.
But, if you have bitcoin not in an IRA and want to avoid taxes, do lots of trades in Monero and Zcash (ie, from one Monero addres to another). The IRA can't see when you bought it, unlike ETH and BTC, which is why Monero doubled after it was announced the IRS bought some bitcoin tracking software to start cracking down on those with bitcoin in their Coinbase accounts.
Thank you very much! Enjoying your Maxims book - wishing good luck to your son with college.ReplyDelete