Why Bitcoin is NOT “crypto”

Bitcoin is NOT “crypto.”

Bitcoin is decentralized, censorship-resistant money. It is an immutable bearer instrument, meaning that possession of the key entitles the holder to dispose of the value of Bitcoin, and no entity in the world can do anything to stop that. It is an asset, not a security, meaning that it does not represent debt, derivative, or equity in any enterprise. It has no shareholders, no corporation, organization, CEO, nor any other kind of administrator who can make unilateral changes to it. It has an entirely fair distribution, which is to say that it was worthless for years before it had any value, and no one involved in the project had any special bitcoin allocation. It has always been the top cryptocurrency by monetary usage, market capitalization, and ecosystem adoption. It requires no special hardware or permission to run, and anyone with a regular computer can run a full Bitcoin node.

No other leading crypto asset meets any of these criteria, much less all of them. None of the 20,000 other crypto projects meet all of these criteria. The vast majority of “crypto” projects are scams, created solely to enrich the founders. The few well-meaning projects are securities promising a future payoff, but few practical applications today. No other project can be said to already serve millions of users’ needs for non-speculative purposes.   
The “crypto” space is dominated by scammers, grifters, and ignorant sycophants who believe their lies because they’ve been sucked into a shitcoin cult and because they can only profit as long as they keep finding other suckers. The actual founders of these projects typically put all their profits back into Bitcoin or fiat as soon as they can get away with it.
The sooner you understand that Bitcoin is unique, the sooner you can get away from pump and dump schemes and put your wealth into the asset most likely to safeguard your wealth.
Bitcoin is not “crypto.”

Below, I will break down the ways in which Bitcoin is unique, critique some of its competitors, and then answer some of the criticisms made against Bitcoin.
This newsletter is based on my talk “Bitcoin vs “Crypto” why they are not the same” at Liberty On The Rocks Denver, which you can watch below:

https://www.youtube.com/watch?t=79&v=xUDSP6yOZC0&feature=youtu.be
Why Bitcoin?
Bitcoin creator Satoshi Nakamoto:

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.

Unlike the vast majority of “cryptos,” Bitcoin solves a real problem,
the problem of modern civilization: fiat money. Why is fiat a problem?
The US government and our economy are being kept afloat by a giant “everything bubble” that assumes that the world will keep buying dollar-denominated debt. When the bubble pops, the dollar will collapse, and the world will need a new reserve currency. In other countries, the bubble has money has already collapsed, and Bitcoin is already a lifeline.
The corrupting influence of inflationary fiat money has infiltrated and ruined every aspect of society – I highly recommend Saifedean Ammous’ book “The Bitcoin Standard” for the gory details.

Unlike shitcoins, Bitcoin solves a real problem affecting billions of people – and that is why it has the most real-world adoption.
Why promote maximalism now?
Warren Buffett: 
Only when the tide goes out do you discover who’s been swimming naked. 

The crypto-bear market is upon us. Many scams and vaporware projects have failed, and many people are getting turned off crypto assets entirely, which is why it’s a good time to remind you that Bitcoin is not crypto. Speculators who are here for a quick buck will come and go, but Bitcoin is here for the long run. Now is the time to highlight this fact.
Bitcoin is different
Bitcoin is better money, the best money

Bitcoin is better money – actually the best form of money ever. It doesn’t pretend to remake the web or introduce exotic financial instruments or allow your company to run itself, or a new art form. It’s just money. It’s been better money from the beginning because it’s digital, decentralized, and scarce. 
Jimmy Song:
Bitcoin actually has a use case that people all over the world are using. Jimmy Song: “Crypto” is not any of these things because its leaders are like politicians, making promises they won’t keep.

Bitcoin is not a security
The U.S. Supreme Court’s
Howey test: “an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Nearly every other crypto asset is a security: it’s a project run by a centralized team, with the goal of making a profit. Token buyers are investors, hoping to earn a reward from the work of that team.  

When you buy a crypto token, you’re betting that the team that runs the token will beat 10,000 other projects and make you a profit. Often, they are backed by millions in venture capital, which they use to sell their investment.
Bitcoin is different. There is no one in charge, no “Bitcoin CEO” or marketing team, no venture capital, and no securities token. Bitcoin is truly decentralized, and all decisions are made by a community consensus process.
We can see evidence of centralization the fact that other networks can simply reboot their blockchain when they have a bug, or the fact that Ethereum’s supply schedule changes more often than the weather. There will only ever 21 million Bitcoin, and there is no group or charismatic leader in charge who can ever change that.

Bitcoin has no demagogues

Cory Klippsten, the CEO of Swan Bitcoin:

“Why is Bitcoin not a Ponzi scheme? The big difference is that there is no entity or group of people that control Bitcoin who are marketing Bitcoin to be able to dump it. If anything, most Bitcoiners that promote Bitcoin are just buying and holding as much as possible — and people who love it the most are the people who never sell.”

Bitcoin has a fair distribution

Bitcoin is the only blockchain that has a credible claim to a truly fair distribution:
* No premine (Satoshi didn’t grant himself any coins)
Satoshi gave a 2 month heads up before launching the network (no sudden release and no mining before release)
* Coins had no value for 1.5 years so they circulated freely (it’s not even possible for an altcoin to replicate this)
* Satoshi never cashed out (unlike every altcoin founder in history and I bet it stays that way for eternity)

By contrast, Ethereum launched with 12 million ETH for the developers, and 60 million ETH for sale as an “initial coin offering” during the presale.  

Bitcoin is #1

All other cryptocurrencies only exist because of Bitcoin: Bitcoin enabled an instant global payment network and final settlement for other digital assets.  If you own another cryptocurrency, there is a good chance you bought it with Bitcoin.
If you hear about any other project, it’s because of a marketer/promoter, whereas Bitcoin’s growth is organic.

Bitcoin is useful today

Bitcoin is the only crypto asset with underlying non-speculative demand. It is useful today as a long-term store of wealth and medium of exchange. The only reason to own altcoins is speculation. If they ever acquire a practical use, you can just buy them when you need them. Only Bitcoin is Legal Tender in El Salvador & the Central African Republic, has tens of thousands of ATM’s, and saves lives in bankrupt countries like Zimbabwe and Venezuela.
Conclusion:

Is Private Censorship Still “Censorship?”

Commentary on my last post:

Whether it’s a private entity or the government doing the censorship, it’s still wrong and harmful, and for some of the same reasons.

Government censorship is far worse than private censorship because it eliminates your ability to speak on any platform.

But the value of free speech is a universal principle, not a just political one. Human progress requires open debate. This is one of the key principles of the Enlightenment responsible for the surge of progress and human development in the modern era. Toleration of disagreement is essential for the pursuit of knowledge.

A platform committed to the principle of free speech has a moral obligation to maximize the speech it tolerates, even if that speech is wrong or repulsive to the operators. That doesn’t mean that platforms must allow disruptive or illegal speech. All platforms must have some policies to restrict disruptive behavior like spam or illegal behavior like crime.

A platform is not the same as a social community. A community is a group of people committed to common values or interests. Communities often need to restrict speech to facilitate their mission. For example, a marine biology community can’t have outsiders promoting day trading schemes. A social networking platform is a host of communities and has a moral obligation to maximize the range of speech it tolerates.

One of the primary problems with social media censorship is confusion about the concept of “harm.” Illegal behavior like threats of violence are disruptive of speech and should be banned by social platforms. However, the intellectual elite no longer differentiates between physical harm and harm to emotions, or often simply wrong ideas. If harming emotions is prohibited, then all speech is vulnerable, since we cannot be responsible for other people’s feelings. We pay lip service to freedom of speech, but we no longer understand what it is. The Enlightenment has drawn to a sad end.

In the last three years, we’ve seen censorship of speech using the wrong pronouns, censorship of speech that contradicted government health advice, censorship of speech that represented government health advice at one time, but was changed later, censorship of speech because people of the wrong nationality commented on another country’s politics, and censorship of speech for no reason at all, because the AI trying to censor wrongthink is easily confused. On the other hand, when someone on Facebook threatened to literally murder me, Facebook told me it reviewed the message and found nothing wrong, demonstrating where its priorities lie. Too bad he did not misgender me or told me not to take a vac**ne, or call me a politically-incorrect slur.

In short, censorship has been weaponized to push the political agenda of the group in power, and the elites are seeing just how far they can push thoughtcrime.

By the way, even as the elites trust our ability to tell truth from falsehood less and less, the intellectual and material tools we have to evaluate the truth for ourselves are better than ever. We have the intellectual tools of the scientific method, statistical science, and empirical knowledge of the world. These tools would be awe-inspiring to the natural philosophers of the past. We have the material tools of the Internet, engineering, and mass-produced scientific instruments making the truth more accessible than any time in history. Yet our intellectual elites have responded to the mass-accessibility of truth with an unprecedented wave of censorship and intolerance.

Can Bitcoin Fix Big Tech Censorship?

Today is the start of Hereticon, an annual conference that celebrates heretical ideas. Why celebrate thoughtcrime? According to Hereticon: 

While our culture is fascinated by the righteousness of our historical heretics, it is obsessed with the destruction of the heretics among us today

Most of the heretics of the past were wrong, just like today’s heretics. But history teaches us that leaps in human progress usually start with radical new ideas that are rejected by “experts.”  

Ignaz Semmelweis, the Hungarian doctor who discovered the importance of handwashing in 1847, was universally ridiculed and forced into a mental asylum for advocating his views. Today, handwashing is one of the least controversial positions imaginable, but there is no shortage of radical ideas that will get you “canceled.”

While many blame “woke cancel culture”, “big tech”, or “big government, ” the root of hostility to heretical ideas is in our epistemology – our understanding of the origin of knowledge. To nurture radical new ideas, we need a marketplace of ideas that values both dissent and rationality. I believe that Bitcoin will play a major role in making these new marketplaces possible.

What Is The Problem?

The problem with “Big Tech Censorship” is not that big tech is run by the left. It’s that the enlightenment idea of objective truth has been replaced by tribalism. “Truth” is determined by group identity, not the relation of your ideas to reality. If a “majority” of “experts” say something is true then that is true. 

Reality is objective – it exists independently of our opinions. The only way to obtain knowledge is through empirical evidence and a valid epistemological process – what we call “the scientific method.” The means to discover the truth are available to everyone with an Internet connection today. The problem is that intellectuals on both sides of the political divide no longer believe people to be capable of evaluating facts for themselves. They think that we believe whatever the groups we identify with tell us to think. If it is impossible to have a rational discussion about truth, then force is the only way that we can establish the “truth.”

The Importance of Dissent

Moral and intellectual progress requires all issues to be open to debate.

We should value disagreement because we believe that every bold new idea begins as a radical thought by a single individual. An open marketplace of ideas is required for the best ideas to flourish. Just as material markets require the freedom to adapt to a constantly changing world, so does the marketplace of ideas. Any society that forbids open debate faces stagnation, decline, and ultimately ruin. This has nothing to do with whether the entity doing the censorship does so through government censorship or through “community standards.” 

It is fine for a community to exclude some views. A “community” is a group of people with like-minded ideas interests, and it is necessary to exclude disruptive individuals from such a group. But social networks like Facebook, Twitter, LinkedIn, TokTok, etc are not “communities.”

A social network is a platform for communities. Not allowing the communities within a platform to decide which views are acceptable leads to the decline of the entire platform. When such censorship is embraced by all social platforms, it leads to the decline of a society.

(Note: Politicians in democracies don’t like to censor directly, but they often employ the threat of censorship with Congressional hearings and the like. It’s usually impossible for users to tell whether a private platform censors of its own volition or under duress.)

More Closed Platforms Are Not A Solution

There are three reasons why it’s hard to compete with a Facebook or a YouTube:

First, 99% of the content that people want to post does not violate their rules. Of the 1% that is blocked, most is worthless, but .1% is vital commentary. It’s that .1% that we need to protect. It’s impossible to compete with Big Tech because that 99% of content has too much network lock-in for an alternative to succeed. (Sorry Parler, MeWe, Gettr, etc).

 A second problem is that any alternative to Big Tech platforms will start with users who Big Tech rejected. The alternative platform will require those users to survive. By virtue of being rejected by Big Tech, the alternative will be banned by Big Tech for refusing to censor “unacceptable” content. They will be kicked out of app stores, their payment provider will cancel, their web hosts will cancel, their SMS, auth, email, KYC, DNS, firewall, CDN, messaging, and every other service provider will cancel. As a CTO, I depended on over a dozen different services to power my organization, and over the course of 2020, most of them updated their terms of service to justify censorship of politically incorrect customers. 

The third problem is that running a platform is expensive. To pay for the platform, you need advertising. But if most (or any) of your content is what Big Tech rejected, you will find it difficult to attract advertisers. If you try to get users to pay for your service, your payments processor will fire you, as OnlyFans found out.

The Need For Decentralized Alternatives

The more intolerant the legacy networks become, the more motivation and expertise will flow into decentralized alternatives like Mastodon, PeerTube, ActivityPub, and Diaspora. 

However, content is not enough. To enable an alternative, we need to decentralize the content layer, the Feed, and the value layer.

Decentralizing Content

IPFS is a peer-to-peer protocol for censorship-resistant content storage.  

Decentralizing The Feed

The Feed is the personalized list of Facebook posts, Instagram photos, Twitter Tweets, & TikTok/YouTube videos you see to discover new content on each platform. The Feed can never be neutral or objective. The Feed is tailored to your interests, but it depends on both machine learning and product managers’ opinions about what you like. Because there is always far more content created than you can consume, each platform has to decide how to filter that content to maximize the appeal of their platform. This is necessarily a subjective process – should you see more news posts or posts from friends? Should you see more inspirational, graphical, or factual content? What content should be excluded entirely? These questions are data-driven, but ultimately humans decide on the tone of each platform. The Feed is very good at being addictive and is one of the main reasons why second-tier platforms cannot compete. The Feed is expensive to maintain, but being customized also makes it very valuable.  

I would like to see Content separated from Feed. Search engines are examples of Feeds competing for the same content, but we don’t have an equivalent for social networks. You should be able to create Content once, then choose what Feed service to use to discover other’s content. If a Feed becomes too intolerant or allows too much spam, I could switch to another Feed to find my content. My friends would discover my content through several Feeds, tailored to their vision of content discovery.

Decentralizing The Value Layer with Bitcoin

Until we have a censorship-resistant Internet, we cannot have censorship-resistant social networks. To have a censorship-resistant Internet, we need censorship-resistant money, because running social networks is expensive, and centralized payment services are single points of failure. Space on the feed has enough value to pay for decentralized networks, but we need censorship-resistant money for advertisers to pay for space on the feed. Bitcoin can fulfill this role.

What Can I Do?

  • Support decentralized payments by using Bitcoin
  • Use Brave browser, or another browser with built-in support for decentralized content hosting like IPFS.
  • Publish content on blockchain-powered content platforms like Steemit
  • Let me know if you have other ideas.

Addendum: Is Private Censorship Still “Censorship?”

How To Tell If A Cryptocurrency Or DeFi Platform Is A Scam

My survey of 2500+ crypto scam victims identified some key signs that a crypto project is a scam. Whether it’s a scam from the start, or just doomed to fail and waste all your money, here are six ways to tell if a crypto project is a scam:

1: Does this project have a legitimate profit model?

There are a few legitimate ways to make a profit in crypto, such as mining, lending, staking, and yield farming. Learn what each means to so can evaluate if an opportunity is legitimate. Never invest money in projects whose business model is not disclosed or that you do not understand.

Legitimate CeFi platforms clearly state what they do with customer funds, list their fee schedule, and expected returns. DeFi platforms should list token allocation, a link to the whitepaper, and smart contract source code. Never invest in Defi projects without a whitepaper or documentation stating the tokenomics.

2: Is this project feasible and sustainable?

Even if a project is legitimate, it needs to have a business model that is scalable and sustainable. For example, many projects aim to create coins for very narrow niches, like a token to pay your dentist. Such a project will never achieve a very large market cap. It’s also not sustainable because the token doesn’t add any value to its target market, and so it will never pay off for investors.

3: Does this project have independent verification or third-party certification?

Be extremely careful about platforms that offer to trade your money. There are only a few legitimate ways for businesses to trade customers’ money. In the US, they must be either a hedge fund or registered brokerage. They will be licensed with a regulatory body such as FINRA & SIPC or the SEC (via FORM D filings). Be aware that scammers are impersonating licensed financial professionals, so it is necessary to independently verify their contact information via FINRA BrokerCheck, LinkedIn, etc.

Note that hedge funds are not even legally allowed to directly advertise their services, so if someone is messaging you via Instagram and asking for deposits in anonymous crypto payments, it is 100% a scam.

In DeFi, services like RugDoc rate the legitimacy of financial platforms. RugDoc will tell you if a project has passed independent security audits like Certik. Never invest in a DeFi project without a security audit, or if rated as high risk by RugDoc.

4:  Can you independently verify this token or platform?

A common scam in crypto is to impersonate a legitimate platform or token. To avoid this scam:

1: Always access crypto services through their official website and never trust “support” links found through search engines or social media.  Scammers are placing search ads that fool you into thinking their fake website is a legitimate platform.

2: Be very careful of social media recommendations. Always check independent sources like RugDoc (for DEFI) or FINRA (for CeFi)

3: If buying a token, confirm the contract ID matches at CoinMarketCap.

5: Is this project run by a reputable team?

Many DeFi projects are anonymous, but CeFi projects should always disclose their management team. Always check that the bio on the project page matches what you can find on LinkedIn and Twitter.

Launching a cryptocurrency exchange is an incredibly technical endeavor. Does the management team have the required technical experience or are they just paid celebrities? Do not simply look at the number of Twitter followers they have, as that is easy to buy.

Conclusion: Signs of a crypto scam: 

According to my survey of 2500+ scam victims, fraudulent schemes have a few things in common: unrealistic returns, high-pressure tactics, sales pitches via messaging platforms, no mention of fees, & lack of reputation.

Scammers have deployed thousands of bots on social media platforms like Instagram, Facebook, LinkedIn, Telegram, and Twitter to push their platforms or pump up their tokens. Never trust social media recommendations, even from a friend, as scammers are hacking profiles to push their scams. Check to see if a project has a legitimate community on Reddit or Discord.

If in doubt, keep in mind that the safest strategy is always to buy and hold Bitcoin on your own hardware wallet.

Originally posted at The Bitcoin Consultancy.

Six Reasons Why Bitcoin Is Superior To Gold

Gold and Bitcoin are fungible, durable, portable, divisible, & scarce. Both have limited acceptance today: there are few goods & services you can buy directly with gold or bitcoin. 

But Bitcoin has six advantages over gold:

1: Bitcoin is far more portable than gold. You can send it anywhere in the world instantly for a trivial fee.  

2: Bitcoin transactions can be instantly and remotely verified. It’s impossible to fake a Bitcoin transaction. Verifying receipt of gold bullion is an expensive, error-prone, and physical process that requires either trust or expertise in gold assaying.

3: A bitcoin is divisible into 100 million satoshis. Gold bullion can be expensive or impractical to split into tiny fractions.

4: The supply of Bitcoin is completely independent of the price. The creation of Bitcoin follows a fixed schedule with a hard limit of 21 million. The supply of monetary gold increases when the gold price goes up, due to increased mining and redirection from industrial use.

5: Bitcoin is relatively easy to secure. You can memorize a Bitcoin seed. Bitcoin can only be stolen by improper security & privacy practices. On the other hand, even the most secure gold vault is vulnerable to armed theft by criminals and governments – as has often happened

6: Bitcoin currently has limited vendor acceptance, but you can use Bitcoin debit cards with point of sale conversion to fiat. Gold can be used as a store of value, but in most of the world, it involves much effort to be exchanged for goods. There is already one country that uses Bitcoin as legal tender (El Salvador) and this number is likely to grow.

So Why is Gold More Valuable Than Bitcoin?

Gold does have one important advantage over Bitcoin: 

Gold has been used as a store of value for all of human history, all over the world. Bitcoin is only 13 years old. This is why the market cap of above-ground gold is currently 10x that of Bitcoin. On the other hand, the fact that Bitcoin has grown nearly 200% per year to a market cap of nearly $1 trillion demonstrates that it is rapidly gaining credibility.  

Over the long run, I expect the fundamental advantages that Bitcoin has over gold to be reflected in their relative market caps.  

Is Inflation Good For The Poor?

The Intercept story “Inflation is Good For You” argues that “Inflation is bad for the 1 percent but helps out almost everyone else.”

After denying the threat of inflation, then claiming that it is transitory and that it would fade away, the mainstream is finally admitting a wave of unprecedented inflation for the foreseeable future. So now the story is that inflation is good for the poor. President Biden claims that a massive expansion of government spending will actually reverse inflation.

The Intercept story has more holes than swiss cheese, but I want to rebut the central thesis of the article. Is inflation bad? Spoiler: the worst aspect of inflation is not rising prices or eroding savings, but the censorship of price signals required for a thriving economy.

Demand-Pull Theory Doesn’t Explain Inflation

The unstated theory of the author and the mainstream economic model that guides the monetary policy of the world’s central banks is Keynes’ model of Demand-Pull Inflation. The theory goes like this: when aggregate demand exceeds the value of aggregate supply, producers raise prices. In response, governments can raise interest rates to reduce demand, slow economic growth, and end inflation. Problem solved!

If the master planners at the Federal Reserve simply need to pull a few levers to fix the economy, why has the global economy had a series of boom-bust cycles ever since the Fed was founded in 1913? The usual excuse is that the government simply hasn’t imposed enough regulations to stop the pesky capitalists from screwing up their central planning.

The Austrian economic school provides a comprehensive response to Keynes’ economics.  Say’s law (Jean-Baptiste Say, 1803) provides a simple refutation of Keyne’s demand-pull theory. In order for someone to buy goods, he must first produce something of value to obtain the money needed to pay for those goods. Production is the source of all economic growth, not consumption. Economic growth is an increase in supply, not an increase in consumers demanding more. To consume the product of others’ labor, you must first produce something they find valuable. Government edict can change what goods are produced, but it cannot magically command new workers, factories, and materials into existence.

What Is Inflation?

Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon.“ Inflation is a broad decrease in the purchasing power of money caused by governments creating new money. And boy have they been creating it.

Just look at the money being printed by the Fed:

Since Covid 19 began, the M2 supply has jumped from $15 trillion to almost 20 trillion dollars. Quick quiz: if the same amount of economic activity is served by 40% more dollar bills, what will happen to prices? It’s not a question of if but when.

The question of why the government had to print so much money is a long and shameful tale, but the ultimate result is inevitable: massive inflation.  

Inflation is much worse than the official numbers suggest:

First, in an economy with a hard (fixed) money supply, we should have deflation proportional to the rate of economic growth

Second, the United States has been able to hide away most inflation, mostly by exporting dollars as a global reserve currency. 

Third, the official deficit numbers are misleading because much government spending (like government-backed student loans and mortgages and quantitative easing) doesn’t end up on the books.  

What we are seeing now is not the beginning of a period of higher inflation, but an unprecedented expansion of the money supply causing the Fed to lose control of the narrative and have to admit it in official indexes.

So Why Is Inflation Bad?

The problem is not that prices are going up. If prices merely increased by some steady amount each year, we could adapt to them, just as employees expect a 3-4% base salary raise every year to match inflation. Likewise, producers and lenders would have no problem adapting to a universal increase in the price level.

The problem with inflation is that it’s not a universal increase in price. Inflation is what happens when politicians print new money to hand it out to their constituents instead of raising taxes. Raising taxes is hard but running printing presses (physical or digital) is easy.  

To understand why inflation is harmful, we need to understand what prices are: prices are signals about which activities are valuable to people. When the price of a good goes up, producers direct more resources into the production of that good. When the wage of a job goes up, more workers are directed to that industry. This “invisible hand” of the market continually optimizes human activity to direct human effort to the most valuable activity.

The main evil of inflation is that it corrupts this information flow. Inflation begins when governments give new money to favored groups. The recipients of new money spend it at the current price, whereas the downstream users of that money spend it at a higher, inflated price. Instead of prices signaling which activities are socially valuable, they signal activities supported by the government’s printing presses. Inflation corrupts the economic harmony that directs resources to their most valuable use.

If you remember one thing, it should be this: 

“Fiat” is another word for “decree” or “edict.” It’s called “fiat money” because governments force people to use their money by decree. Through inflation, fiat money forces people to allocate their lives to the causes the government’s money benefits instead of those they would voluntarily choose for themselves.

Inflation Is A Hidden Tax

All taxes are signals which force people to produce goods they would not voluntarily produce. But taxes are different from inflation in that both the tax burden and the recipients of tax income are generally auditable by the electorate. Inflation is a hidden tax that subtly changes the incentives throughout an economy to erode its ability to produce wealth.  

Because it’s hidden, inflation is highly addictive to the political system. Government programs depend on printing money to a far larger extent than official deficit numbers suggest. Even if there was suddenly a broad awareness of the harms of inflation and a political movement to curtail it, moving to a sound money system absent a complete collapse of the dollar regime would still be outside the realm of possibility.

Inflation Wrecks The Structure Of Production

Why is the economy suffering from shortages of seemingly everything? It has nothing to do with a “chip shortage,” or the Suez canal blockage, or just-in-time manufacturing. These are only the symptoms. The root cause of the “everything shortage” is the government’s manipulation of the money supply.  

One of the main disagreements of the Austrian school with Keynesian economics is the emphasis it places on the structure of capital. Capital is not a monolithic blob of “aggregate supply”, but a hierarchy of lower and higher-order goods. In order to produce consumer goods, capital must be employed. To make your Venti Frappuccino (first-order good), a barista uses an espresso grinder (second-order good). The grinder requires steel and microchips (third-order goods).

When the government created new money for the stimulus programs, that money first went to consumers, who voted with their wallets to shift the structure of capital from the production of higher-order (production) goods to lower-order (consumption) goods. Inflation robbed producers with low time preference and redistributed the loot to consumers with a higher time preference. The shortages were a result of inflation eating the “seed corn” of capital needed to maintain and expand production.

So what should happen when an external shock (such as pandemics and lockdown policies) constrains production and changes demand patterns? The economy needs to re-structure to rebuild the structure of production to reflect the new reality. Uncertainty causes consumers to save more, which frees up higher-order capital to shift to new demand trends. Capital can focus on producing PPE, webcams, home exercise equipment, and consumer groceries rather than restaurant supplies, office buildings, airliners, etc.

The inflation-powered stimulus packages attempted to “freeze” the economy in pre-pandemic spending levels and thus crippled the adjustment to the new reality. The rest was inevitable.

The Myth of Idle Capital

President Biden claims that the “Build Back Better” stimulus package will reverse inflation by “reducing bottlenecks” in the economy. This thinking is straight of out Keynes’s General Theory (1936). Keynes believed that government spending is needed to put “idle” resources to work and stimulus the economy.  

William H. Hutt refuted this idea in “The Theory of Idle Resources” (1939). Politicians cannot create new capital and labor. They can only force people to do the government’s bidding rather than what individuals believe is in their best interest. If some capital is idle, it’s because it currently provides no economic value to people. “Build Back Better” is just the latest version of the belief that the government’s central planning is more efficient than the price mechanism of the free market. Though Mises, Hutt, and many others refuted these ideas in the 1930s, the backdoor of fiat money allows politicians to try the same failed policies without consequences.

Does Inflation Help The Poor?

The Intercept claims that inflation is good for the poor because it will make debts easier to pay off. Supposedly, rich lenders will suffer while the poor are granted a reprieve.  

Do you really believe the elites suffer more under any economic policy? While banks may lose some money, they are also the first recipients of new government money!  

There are many reasons why the poor always suffer the most from inflation:

* A far larger percentage of poor households’ income is used for basic needs. 

* The wealthy get most of their income from inflation-protected assets like real estate, business interest, and stocks.

* The prices of basic goods increase faster than luxury goods.

* Families with low incomes will be pushed into poverty, while the middle and upper classes can cut down on luxuries.

* Debt is a wealth-maximizing strategy for the wealthy, while it’s a survival strategy for the poor. 

* Although existing mortgages and student debt will depreciate, interest rates on new debt will go up dramatically!

Though the very idea that inflation helps the poor is absurd on its face, it’s not the fundamental error of the article. The central problem is the idea that high inflation is just the price we pay for economic growth. If you have understood the above description of inflation, you should understand that this is another way of saying that government central planning of the economy is more efficient than the market. If you believe that, look up the thriving economies of the USSR, North Korea, Venezuela, or Cuba.

How to Avoid Buying Trash Crypto That Wastes Your Money

Original posted at The Bitcoin Consultancy

If you can imagine a way to lose money in crypto, I’ve heard it. Since 2017, I’ve heard from thousands of victims of every crypto scam imaginable.  

But for every crypto scheme which is outright theft, there are ten trash crypto-assets created mainly to take your money and run. Each project has a story of why they are a great investment. But dig deeper and the business model is a mirage. What the founders really want to do is create as much momentum as possible and sell at the top before the illusion of value vanishes.

Sometimes you don’t have to dig very deep. For example, “BabyCake” is an explicit Ponzi scheme, if you look beyond their promises of “bringing passive income into people’s lives.” It’s one of the first tokens to have a Ponzi scheme built right into the smart contract. I count 63 other “baby” named pyramid schemes.

Usually, though, the catch is buried deeper and requires understanding the crypto ecosystem. Let’s review why there are so many scams and trash coins in crypto and how to avoid them.

Why are there so many crypto scams?

Anonymity

Cryptocurrencies are only pseudo-anonymous. It’s impossible to know who owns some coins from an address alone. But if you interact with the legacy financial system, for example, by cashing out your gains for fiat, your identity can sometimes be found. If you commingle your funds by moving them together, it’s possible for a chainanalysis algorithm to link activity to an identity. When I try to help victims of fraud, I can often follow the transaction trail to the cold-wallet of some exchange where the crooks traded Bitcoin for a local currency. 

I think the bigger problem is that our legal systems aren’t adapted to deal with crypto fraud. Our legal institutions don’t take small-scale crypto fraud as seriously as fraud with “real” money. Lack of international cooperation means that even if I know which exchange was used to cash out stolen crypto loot, they are unlikely to cooperate with local law enforcement.

Bleeding Edge Technology

Bitcoin and cryptocurrencies are still very new. The tools needed to secure Bitcoins are still evolving and rough around the edges. I predict that in a few years, we will carry credit-card-sized devices with biometric readers that make storing and using Bitcoin both safe and foolproof. Until then, the tools for storing and transacting cryptocurrencies are rapidly evolving. There are safe methods to keeping your crypto safe (like hardware wallets, multi-sig, and steel seed backups), but many people aren’t aware of the proper techniques. Accidental and malicious loss of funds is, unfortunately still common.  

Transaction Finality

A bigger reason for fraud in crypto is that crypto transactions are irreversible for almost all coins. In the legacy financial system, a fraudulent credit card charge, bad check, or unauthorized wire transfer can usually be reversed. If the theft is big enough and your lawyers are good, the legal system will tend to intervene on the victim’s side. In the crypto space, however, no matter how unjust the theft, there is nothing that can be done.  

(Keep in mind though that government theft of savings through inflation and taxes is a far bigger problem than theft of crypto. While this is unfortunate for victims of theft, transaction finality is one of the primary reasons why Bitcoin is so revolutionary: it is impossible to conduct legal plunder of people’s wealth.)

A Free-Market Alternative to Wall Street

“Wall Street” (i.e. traditional securities markets) is often portrayed as the epitome of capitalism. The reality is that the government has regulated most of the profits out of securities available to the non-elite. Crypto-assets and exchanges allow novice investors access to venture capitalism for the first time since the Securities Act of 1933 limited investments in unregistered securities to “accredited” investors. Initial Coin Offerings offer normal people the ability to invest in startups without having to be worth or put up millions of dollars. DeFi (decentralized finance) exchanges operate using smart contracts, without any centralized entity to regulate. With DeFi, anyone to mint and create a market for a new token, outside the ability of any government to regulate.

The flip side is that just because everyone can create and sell their token does not mean they have a viable business model or any technical skills. All you need to be able to do is market your coin, not do anything useful with it. The vast majority of crypto projects trend back to a value of zero.

Bitcoin’s Success Inspires Copycats

Most crypto scams are not outright theft but an attempt to make a quick buck by riding on Bitcoin’s coattails. Profiting from Bitcoin’s rise requires an initial buy-in and patience. Want to make billions with an investment of zero? Too impatient for a mere doubling of your money each year? Just copy Bitcoin’s code, change a few parameters (invent some justification why they are needed) and launch your own altcoin. Repeat the scheme a few more times and get 12,881 crypto-assets tracked by CoinMarketCap.

Many projects start out well-intentioned. The founders may want to be revolutionaries just like Satoshi Nakamoto or they might have some justifiable disagreements with the team that maintains Bitcoin. However, the decentralized nature of crypto assets means that once a coin is out there, speculators will run with it. Quite often, the founder exits early with a small fortune and the project evolves in a completely different direction. The founder of Dogecoin sold everything to buy a used Honda Civic. His coin now has a $32 billion market cap.

Today, the crypto-asset market has a market cap of $2.5 trillion, 48% of which is Bitcoin. Many beginner crypto investors are branching out into altcoins hoping to see the same astronomic returns as Bitcoin in the early days. Let’s explore why they are wrong and why you should focus on Bitcoin.

How to Avoid Trash Cryptos

I’ve already written how to avoid having your crypto stolen by scams and how to safely store your Bitcoin. Unlike outright theft, “trash cryptos” are schemes where you might not realize that you’re the victim.

Buy And Hold Your Entire Crypto Portfolio In Bitcoin

The only guaranteed way to avoid falling for a crypto scam is to keep 100% of your crypto portfolio in Bitcoin. Investors fall for crypto scams when they try to beat the returns of Bitcoin through a variety of other coins and schemes.

Let’s analyze objections to a 100% Bitcoin portfolio and how it gets investors in trouble:

Objection #1: Bitcoin’s returns are not good enough

Over the last ten years, Bitcoin has consistently earned almost a 200% return. In other words, if you just kept your money in Bitcoin, you would have tripled your investment every year.  

No other cryptocurrency can match Bitcoin’s track record. Consider Ethereum, which has beaten Bitcoin over the last 4 years. But this assumes you had the foresight to participate in Ethereum’s ICO. Ethereum is up 2.7x since its 2017 high, whereas Bitcoin is up 3.3x. The point is that you’re not missing out by not buying the latest hot altcoin. By the time you hear about it, any potential for astronomical returns is long gone. If you had bet on Ripple when it was #2 In 2017, you would only have 1/3rd of your portfolio left.

The only way to become a successful long-term investor is to study the fundamentals of an asset, not its price. Bitcoin is the future of money. No other altcoin comes close to Bitcoin as money. Bitcoin’s top competitors are smart contract platforms of various kinds. Their usefulness for real-world business models is currently unproven.  

Objection #2: You heard some altcoin is better than Bitcoin

Novice Bitcoin traders want to be above-average investors. Of course, we can’t all be above average. But many nonetheless try to add some extra alpha to their portfolio by buying a hot new coin or timing the market. 

Those familiar with the efficient market hypothesis understand the difficulty of consistently beating the market. The prices of assets reflect all current information known by participants. Unless you can consistently evaluate the fundamental value of assets more accurately than others, you won’t beat the average. When you try to time the market, your emotions work against you, urging you to buy after an asset goes up, and sell when the asset is low.

Of course, if you invest in Bitcoin, you’re already disagreeing with the vast majority of investors who have little or no exposure to it. Why not disagree a little more and buy some altcoins? Here is the difference:

Bitcoin has a simple business model (“Hard Money You Can’t F*ck With”) and a 12-year track record. Altcoins are all either a technical variation on Bitcoin (fba vs proof of work, or dag vs blockchain) or an entirely different business model (smart contracts). It’s much more difficult to understand the technical merit and value proposition of these assets. None have Bitcoin’s track record.

As a managing partner of a cryptocurrency hedge fund, it is my full-time job to research and write about cryptocurrencies. Yet the vast majority of my crypto portfolio is in Bitcoin because I do not feel qualified to judge the technical merits of various projects. I have a background of 17 years in software development and architecture. I personally designed a Bitcoin exchange. Do you think you can do better based on YouTube and Twitter personalities?

For example, even if Dash is technically better than Bitcoin, is it going to beat Bitcoin’s network effects? What’s to stop Bitcoin from adding whatever killer feature Dash offers? Are you qualified to make these judgments, or are you buying based on the rumor mill?

If you are personally involved in a crypto project, I understand your decision to invest. But don’t expect to beat Bitcoin based on scrolling crypto news sites.

Objection #3: You want to be a crypto trader

It’s an awesome experience to sit down in front of an exchange trading screen full time. For many of us, crypto exchanges were our first introduction to the power interfaces of marketplaces, with their continuous order books, market depth & candlestick charts, and advanced orders. 

Once you master the advanced trading screen, you feel like you have the key to mastering the markets. By taking a few online courses, you can develop a unique system that consistently earns you profits. During a bull run, when everything is going up, it’s easy to conclude that you are in fact a pro.

It is possible to earn a consistent edge in crypto – just not by you. Crypto markets are manipulated by whales (big traders) with powerful marketing machines. There is no way to predict their actions, but they will use your emotions against you. They also pay lower trading fees than you, while your profits are eaten up by fees.

Objection #4: You want to diversify your crypto portfolio

One of the main reasons people hold a basket of crypto assets is that they don’t know which will be successful in the long run. This is a reasonable concern. In practice, however, choosing which assets should go into your portfolio is very difficult.

The principle behind diversification is that by holding uncorrelated assets, you can reduce the volatility of your portfolio while maintaining the rate of return. Diversification works great for the stock market because the profit margin tends to be the same across different sectors. Also, the stock market has 120+ years of precedent to predict future trends.

The same isn’t true of the cryptocurrency market. The price of crypto is based almost entirely on anticipation of future demand, not current demand. Bitcoin’s price depends much more on speculation than current demand as money. Furthermore, money is a natural monopoly, so it’s likely that only a single coin will emerge dominant. (Likewise for smart contract platforms.)

If we assume that a single asset will emerge dominant, which one do we choose? One option is to look at the total market capitalization of each coin (hence CoinMarketCap.com being the #1 crypto site). But this is misleading. If I create a token called “Veksler Coin” with a supply of 1 billion and sell a single coin to my friend for $1, I instantly have a $1 billion dollar market cap with a $1 inflow. MarketCap rankings are key for adoption, so there is extremely strong pressure to manipulate them. Even though Bitcoin has less than a 50% market cap, the vast majority of fiat inflows go to Bitcoin. In short, there is no reliable metric for market capitalization.

Some organizations advocate automatically rebalancing your portfolio in response to market cap changes. My fund does that to an extent, though we only trade coins that our research has vetted. However, if you are managing your own portfolio, are you prepared to continually rebalance your portfolio — and pay the capital gains tax on any profits?

Objection #5: You want to earn passive income from staking/yield-farming/crypto lending

Many Bitcoin investors believe that it isn’t enough to hold Bitcoin. You don’t just sit on your cash, right? You invest it in a productive enterprise to earn a return. Just holding an asset is speculation, and that’s bad, right?

There are two problems with this reasoning:

First, Bitcoin is fundamentally different from fiat money. The problem with fiat money is that it’s an inflationary asset. You have to put your money to work just to preserve your wealth. By contrast, when the quantity of money is fixed (as with hard money like gold or Bitcoin), a growing economy means that the share of wealth represented by each unit keeps increasing. Furthermore, the adoption and therefore demand for Bitcoin is rapidly increasing. Bitcoin is not just a static asset like cash or gold. It is also a money transmission network that provides ongoing value to people. Simply holding Bitcoin is an investment into the future of money.

Is a few extra percent return on top of Bitcoin’s 200% average worth risking your principal?

The second issue with many “crypto-investments” is their inflationary design. Consider staking. Cardano staking returns a 5.x% APY reward rate. Cardano also has a 5.7% inflation rate. You must stake to preserve your wealth. This is Cardano’s way of motivating users to delegate their ada to trustworthy stake pools. Staking may be a legitimate way to secure a crypto asset, but it isn’t a legitimate income stream.

More egregiously, consider coins like CAKE, which has a 73% APR (previously 450%+) in the Auto CAKE Syrup Pool. How is PancakeSwap able to offer those returns? There is a handy chart here. Clear as mud? The supply of CAKE is completely arbitrary and the reward rate is a combination of investor subsidies, high growth rate, and high inflation that changes day by day completely at the whim of the CAKE governance process. It’s fun to gamble with, but should you trust your life savings with this scheme?

Objection #7: You want to trust an expert (or algorithm) to trade your crypto

Never expect other people to be smarter with your money than you.

Many people will give you advice on how to invest your money. But just because someone made a lot of money managing other people’s money, doesn’t mean they did their customers a favor. Extensive research shows that index funds perform better than actively managed funds. Crypto isn’t any different.

Keep in mind that the volume numbers of many exchanges on CoinMarketCap are fake. It is much easier to manipulate the prices of crypto assets than you would think. Twitter, Telegram, and YouTube are filled with pump and dump schemes. If an investor finds a consistent advantage in the market, he will not give it up by publicly sharing it. Only those who can’t make a living by trading run YouTube channels about it.

The only reputable actively traded crypto funds are crypto hedge funds. They are open to accredited investors and have minimums of $50K and up. Be very clear on the value they are providing over you just holding Bitcoin before you decide to invest in one.

Conclusion: to avoid buying trash crypto that wastes your money, stick with Bitcoin

The crypto space moves fast. Dozens of new coins go live daily. The top 10 coins today look very different than five years ago. I can’t promise you who the leaders in this space will be in the future. What I do believe in is that fundamental value is what drives long-term trends. The asset that has the most universal business model, can scale to meet consumer demand, has the biggest real-world network, and the most robust community is Bitcoin. If that changes, I’ll be the first to let you know.

How Fiat Money Corrupted Savings & Made Us All Market Speculators

Originally posted at The Bitcoin Consultancy

Before the world switched to a fiat monetary system, people who wanted to build wealth kept their savings in a bank. Interest rates tended to equal the average rate of profit, which was enough for all but a small minority of professional investors and entrepreneurs. 

This all changed with the move to a fiat monetary system and the devaluation of money. Today, the majority of households own stocks — not because they wish to be investors, but because it is the simplest means of protecting savings. As a result, the political system has become highly involved in market outcomes. The real return of securities markets has been greatly diluted, created perverse incentives, and global risks for the economy.

Historical context

Before the creation of the Federal Reserve Banking System, the class of investors was small and limited to finance professionals. Everyone else earned income on their savings by keeping their savings in a bank. For example, the interest rate was 8.1% in 1798.

This changed in the 1920s, the Federal Reserve System fueled a huge credit expansion that caused the stock market bubble. Easy credit drove the return of the stock market to dramatically exceed the return on savings. We know what happened next

By 1952, 4.2% of the U.S. population owned stocks. The 2008-9 financial crisis had a dramatic impact on interest rates when the government injected massive amounts of money into the banking system. Rates have remained low ever since. Today, over 50% of households own stocks, rising to 88% of $100K households.

Savings in a pre-fiat, gold-backed monetary system

In a market economy, the rate of business profit tends to equal the interest rate. The rate of profit tends to even out across all sectors since money flows to more profitable sectors until the rate equalizes. Capitalists borrow money in proportion to the rate of return on investment. When investments are more lucrative, the interest rate increases until the cost of borrowing money equals the potential return — and vice versa. In this manner, savers in a pre-fiat monetary system needed to keep their money in a bank to reap the rewards of a growing economy.

Savings in a fiat monetary system

In a fiat monetary system, the government artificially lowers the interest rate by expanding the money supply. Savers have to shelter their wealth in inflation-protected assets because the fiat system devalues savings through inflation. 

Wealthy families have other channels to protect their wealth – such as real estate and business interest, but for the middle class, their main means of protecting savings are their 401k and their primary home. 

The corruption of the joint-stock company by fiat money

Passively managed index funds now account for the majority of U.S. equity funds. While they are great for investors, they only exist because the fiat monetary system has forced savers into the securities market. 

The publicly traded company exists to allow investors to pool funds together in a common enterprise, without incurring unlimited liability for its debts. Participation in a public company ought to come with high risks — offset by high rewards. 

When a company needs funds, it used to raise them through bonds and other forms of debt — with debtors being paid before investors.

This model is very different from the current system. By the time a publicly traded goes public, most of the risk and therefore return has already been taken by venture capital, which only a small group of private equity investors have access to. 

Because so many savers participate in the market, politicians are strongly motivated to intervene in market outcomes. The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and the 2010 Dodd-Frank Act. These regulations made it much more expensive to go public, which has led to an over 50% decline in the number of publicly traded companies. 

There are now just 3,530 publicly traded companies in the U.S. Anyone can buy a stock on their phone today, but by the time the government lets the company sell you shares, most of the profit potential has already been captured by wealthy venture capitalists and private equity investors.

Dividend yield has decreased from 5.49% in 1871 to 1.33%. Because government debt outcompetes private debt, companies issue stocks to raise money instead of bonds. 

Likewise, the price to earnings rate over double historical rates, as savers flock to the stock market — not seeking high returns, but trying to preserve wealth.

Furthermore, the political system is highly motivated to avoid downturns in the market. Politicians cannot prevent economic destruction (that mostly comes from the economic miss-allocation they cause), but they do inflate market prices through inflation.  Easy credit transfers wealth from dollar users to investors, while at the same time, capital gains taxes transfer much of those gains to welfare recipients.  (By “welfare” I mean all recipients of government benefits, individual and corporate.) All this activity accelerates the inflationary death spiral caused by our unstainable welfare system. 

Stock ownership in a free market should be high-risk, high-reward

Stock ownership should be a high-risk, high-reward endeavor for professionals. By contrast, savers should earn the rewards for their thrift by keeping their savings in a bank. A savings account is the original “index fund ETF.”

Bitcoin as a return to sanity

Bitcoin has a limited supply and cannot be manipulated by politicians. In a growing economy, Bitcoin is a deflationary currency. This makes it ideal as a means of saving money. 

Bitcoin savings accounts (such as currently exist in crypto-lending platforms) offer investors a higher return at a higher risk. Their stablecoin interest rate is around 9%. I would guess that this reflects a 6-7% rate of profit plus a 3% adjustment for inflation.

There is no easy way out of the current mess. The same forces driving more and more of the public to become market speculators also make those markets ever more unstable and unprofitable. Loan-bearing crypto deposit accounts (whether they hold stablecoins or cryptocurrencies) are rapidly growing in popularity and may become the high-yield savings accounts of old for savers everywhere.

The shortages were unevitable

What did you think would happen?

1: Lockdowns and unemployment subsidies constrain production

2: Print trillions of dollars and throw it out of helicopters

3: Consumers start spending stimulus money

4: Manufacturing shifts to the production of consumption goods

5: Producers bid up prices of production goods and labor

6: Price increases, shortages, and unfilled jobs everywhere.

It has nothing to do with a “chip shortage,” or the Suez canal blockage, or just-in-time manufacturing. These are only the symptoms. The root cause of the “everything shortage” is the government’s manipulation of the money supply.

One of the most important concepts I learned from Austrian Economics is capital has structure.

In order to produce consumer goods, capital must be employed. To make your Venti Frappuccino (first-order good), a barista uses an espresso grinder (second-order good). The grinder requires steel and microchips (third-order goods).

The stimulus money went to consumers, who voted with their wallets to shift the structure of capital from the production of higher-order (production) goods to lower-order (consumption) goods. In other words, the government robbed producers with low time preference and redistributed the loot to consumers with high time preference. The rest is inevitable.

What should happen when an external shock (such as pandemics and lockdown policies) constrains production? The economy needs to re-structure to rebuild the structure of production to reflect the new reality. Uncertainty causes consumers to save more, which frees up higher-order capital to shift to new demand trends. Capital can focus on producing PPE, webcams, home exercise equipment, and consumer groceries rather than restaurant supplies, office buildings, airliners, etc.

By attempting to “freeze” the economy in pre-pandemic spending levels, the government crippled the adjustment to the new reality. The rest will be inevitable.

Why aren’t all economists rich?

Why aren’t all economists rich? Some are. Economics is the most common degree amongst the world’s top 100 billionaires. Some famous economists such as David Ricardo and John Maynard Keynes were very wealthy indeed. However, for the most part, economists will give you a list of excuses why understanding economics won’t make you rich.

They are wrong.

How do I know this? I used my understanding of economics to become wealthy.

I won’t go into the (lame) excuses economists give. Instead, I will tell you how I used my understanding of economics to build my fortune.

Some of these topics could fill a book, so I’ll just cover the basics. I’ve already written articles about most of these topics.

Compounding returns:

The returns from re-investing profits from an investment are the single most important principle of personal finance.

This taught me a few things: (1) maximize my savings rate (2) invest while I’m young (3) time in the market is more important than timing the market.

Efficient market hypothesis:

The efficient market hypothesis (introduced by F.A. Hayek in 1945) is the idea that prices incorporate all public information about markets. This means that “buy low, sell high” is impossible using only public information.

This taught me:

  • (1) Technical analysis/day trading is stupid
  • (2) Don’t pick stocks (unless you can dedicate your career to it). Invest in broad-based index funds
  • (3) Keep costs low. You can’t consistently generate superior returns, but you can maximize the return from the market by buying cheap ETF’s.
  • (4) Maximize time in the market because you can’t time the market.
  • (5) Consistent alpha generation requires non-public information
  • (6) Don’t trust your money to an “expert.” They are unlikely to do any better than random.

Austrian business cycle theory (ABCT):

The Austrian business cycle theory (Ludwig von Mises, Theory of Money and Credit, 1912) explains how expansionary monetary policy leads to unsustainable investments (the boom), followed by a necessary correction (the bust). This has huge policy implications, but it’s also important for investors.

It taught me:

(1) Bull markets are headed for a correction when investments become unsustainable.

Signs of an upcoming correction may be:

high P/E ratios,

dumb projects getting funded, etc.

(2) Credit expansion (and associated inflationary policies) cannot be reversed. Don’t bet on fixed-return investments.

(3) All fiat regimes end lead to hyperinflation — so protect your assets from inflation. Stocks, precious metals, and Bitcoin provide protection from hyperinflation.

Modern portfolio theory (MPT):

MPT ( Harry Markowitz, “Portfolio Selection”, 1952) is a model to understand the relationship between investment risk and performance. Given a set of investment categories with a given risk and rate of return, you can graph all possible allocations of a set of investments on an efficient frontier: a hyperbola that represents a combination of investments that has the least risk for a given level of return.

It taught me:

(1) While you need to take more risks to get superior returns, you can get a free lunch if your risky investments are uncorrelated. Diversify your portfolio with non-correlated assets to maximize returns given a certain level of risk

(2) Lower your risk with a small allocation into safer assets with minimal impact on returns.

Entrepreneurship:

The capitalist-entrepreneur organizes capital and labor in new ways to make a profit. More generally, entrepreneurship is the activity of creatively organizing these elements to create value. (Ludwig von Mises, Human Action, 1949)

The reward for entrepreneurship is the profit the entrepreneur collects from the value he generates.

Everyone faces the decision to become a wage worker (employee) or entrepreneur. The upper end of the wages an employee collects is the value he creates for the business. The lower end is whatever another potential employee will offer for the same service — in other words, “what the market will bear.”

What this taught me:

No matter how much value I create for the business, my salary will always be limited to the market rates.

There are two ways to raise one’s income:

1: Redefine your job so that the pool of competitors is more exclusive.

2: Become an entrepreneur, so that your income is limited only by the value you create, not the prevailing wage.

In practice, I have done both in my life.

As an employee:

For example, I started my career as a software engineer. I then became a software architect, technology lead, director of marketing, then Chief Technology Architect. My strategy was guided by two questions:

1: how can I create more profit for the business and thus increase my value and

2: how can I limit the pool of competitors by working in a more exclusive role?

As an entrepreneur:

In contrast to employees, entrepreneurs can collect all the additional value they create (after expenses). Aside from a few exceptional careers (CEO, movie star, athlete, etc), entrepreneurship is the primary way to real wealth.

Ever since I discovered the role of entrepreneurship from the Austrian School of Economics, I’ve strived to engage in entrepreneurship even while I pursued my career. Currently, I do this as Managing Partner of Vellum Capital, a hedge fund specializing in cryptocurrencies.

Last word on Abundance:

Economics is all about the study of scarcity. Human beings have unlimited needs in a world with limited resources. The field of economics studies how to best allocate these limited resources to maximize human satisfaction.

But this focus on scarcity can lead us to miss another important lesson of economics. Value does not exist in nature but human beings. Human beings create value for themselves and others when they re-arrange capital and labor to produce goods and services.

While the elements of nature are finite, the potential value that humans can create is infinite. For example, some sand on the beach can provide momentary value when kids play with it. It can provide more lasting value when it is used to mix concrete for a building, or even more if the silicon is made into solar panels, or even more if the silicon is made into a million-dollar supercomputer. The combinations of labor and capital are infinite, and so is the value that they can create.

Economics is all about managing scarcity, but it teaches that the economy is not a fixed pie. Economic activity creates value rather than distributing it. The universe is full of opportunity, and we need only to develop an entrepreneurial eye for our small part of it, to learn how to profit from it.