5 strategies I used to reach financial independence

My portfolio growth rate over the last 6 years has averaged 130% of my salary. In other words, my portfolio increased by 100% of my salary plus 30%. My actual saving rate was between 60 and 70%.

More importantly, over this period my portfolio* grew from about 4x my burn rate to 22x my burn rate. This metric is key because 25x is the standard retirement escape velocity, according to the 4% rule. The 4% withdrawal rule is the rule of thumb used by most financial analysts to predict the percentage of a portfolio a retiree can safely withdraw without drawing down his principal.

Here are five ways I accomplished my financial goals:

My portfolio growth rate over the last 6 years has averaged 130% of my salary. In other words, my portfolio increased by 100% of my salary plus 30%. My actual saving rate was between 60 and 70%.

More importantly, over this period my portfolio* grew from about 4x my burn rate to 22x my burn rate. This metric is key because 25x is the standard retirement escape velocity, according to the 4% rule. The 4% withdrawal rule is the rule of thumb used by most financial analysts to predict the percentage of a portfolio a retiree can safely withdraw without drawing down his principal.

Here are five ways I accomplished my financial goals:

1 Rent instead of buy:

I held out buying my first home as long as I could until covid-19 forced my hand. While homeownership is great for a growing family, renting for nearly the first 20 years of my career was crucial.

The financial tradeoff of rent vs buy is complicated. In short, over the long run, home prices merely keep up with inflation, while the stock market provides a 7% return. On average, it takes about 5 years to break even on the buy vs rent decision.

More importantly, renting allowed me to focus on my career. I could quit my work and move across the country or the world without worrying about a home full of material possessions to drag me down. And I did – moving from Dallas to New York City to Shanghai to Atlanta to Denver within 10 years. I never had to worry about mowing lawns, broken washes, or leaky roofs. It’s possible to throw money at these problems, but avoiding the distraction allowed me to focus on growing my income instead.

2 Track your spending:

You can’t improve what you can’t measure. It’s essential to track your cash flow (both in and out) to improve your situation. I’ve tried dozens of apps to do this, but the key was tracking my finances in Personal Capital – a free tool that tracks your cash flow and investments. The results speak for themselves – it took the first 15 years of my career to save 4x my burn rate. After installing Personal Capital, it took me 6 years to save 22x my burn rate.

Personal Capital can do budgets, but I’ve never kept a budget. Budgeting is a terrible way to think about money.

Let me repeat that: a monthly budget is a terrible way to manage your money.
If something delivers more value to you than it’s worth, you should pay for it. Who cares what you paid for it last month? Every few years, I will go out and spend a fortune on new work clothes, or a computer, or a new car, or (recently) a home improvement project. Who cares how much I spent on it the previous month?

What matters is not how your spending compares to a previous period, but how it compares to the next-best use. For example, before I spent $1000 on a new suit, I will calculate the total return if I saved the money instead. For example, $1000 invested over 30 years will be worth about $8000. Will I value spending $8000 when I’m 70 more than $1000 today?
Your timeline will be different of course – it depends on what percentage of your income is saved for retirement vs upcoming major purchases. The point is that you should balance each potential purchase against the time-discounted value of the next-best purchase, whether that is an iPhone next month or a yacht 40 years from now. It takes time and data to make this calculation automatic and intuitive, which is why a personal finance platform like Personal Capital is key.

3 Single-income household:

My family is a single-income, two-child family – my wife has been a parent and/or a student since we got married. While many see this as a disadvantage, I’ve come to see the benefits of a stay-at-home parent.

The cash flow of a second income is easy to see, but the costs are not so obvious. Aside from higher taxes, work-related expenses, running a household with kids has a lot of overhead, and working parents usually have to throw money at problems to stay afloat.
It’s virtually impossible for both parents to fully dedicate themselves to a career without neglecting their children. Something has to give – either one parent will sacrifice their career, or both will have mediocre career progress. By focusing on parenting, my wife can let me focus on my career during the day, so I can support her needs as a student at night.
Second, because we homeschool, we have very low childcare costs. We took our daughter out of an expensive Montessori school because we found that she learned better at home. Our kids will probably go back to school at some point, but for now, homeschooling is efficient both financially, time-wise, and particularly in giving me the necessary mental break to focus on work each day.

4 Choose side hustles that further your career:

I encourage developing a “side hustle,” but many people get hustles that do more harm than good. The proper function of a side hustle is not to earn a few extra dollars — it’s to grow your value proposition and train for a life of financial independence and entrepreneurship.
Many people get a side hustle that distracts rather than enhances their career. Driving Uber at night or hosting Airbnb guests every night is not going to enhance your career unless your dream is to be a chauffeur or enter the hospitality industry. Same with being a jack-of-all-trades who takes whatever job he comes across.

Is your side hustle causing you to sleepwalk through the workday or work on your gigs from the office? Are you spending more money on tools and supplies for each new gig that you bring in? Are you growing as a professional and building a sustainable, revenue stream with customers that come back to you, or are you doing random, one-off jobs, often for free? Are you giving up new projects at work, a promotion or a demanding new job for your side hustle? If so, it’s holding you back rather than helping you. You don’t need more spending money: you need to create opportunities for you to grow.

A good side hustle should help you to grow in your career or to explore a new one. You should come to the office excited to try out new ideas, not just tired from staying up all night working in an unrelated field. Side projects in your current field often allow you to be in charge of a small project and use the latest technology or techniques that are too risky or difficult to approve with your boss. I’ve used this trick to qualify for jobs that I couldn’t dream of otherwise.

5 Invest aggressively:

After maximizing the spread between your income and your expenses, you need to leverage the magic of compound returns by investing it in the market.

There are as many opinions on investment strategies as there are investors, but unless investing in the market is your full-time job, you will probably not beat the market. You may get lucky, but chances are that if you try timing the market, you will be guided by your emotions, and buy high and sell low. Even the best money managers in the world can’t beat the market.
So my suggestion is: just invest in the market. The whole market, not just the S&P 500. You can either invest in an index fund like VTI (USA) + VEU (not USA) or use a robo-trader that buys individual stocks (this can lower costs and save on taxes).

I use Personal Capital. I can’t speak for other robo-traders, but Personal Capital re-balances my portfolio not only by asset class, but also by market sector, so I’m positioned to benefit from growth in any industry.

  • By portfolio, I am referring to liquid securities and some real estate. I have other assets like business interests, but I’m trying to keep this advice universal.

Restore deleted rides from your Wahoo bike computer

How to restore accidentally deleted rides from your Wahoo Bolt/Roam/etc bike computer:

  1. Get the Android SDK platform
  2. Connect your Element Bolt, Roam, etc via USB
  3. In a command line window, run ./adb devices. This is just to check that adb can see your Wahoo device.
  4. Run ./adb pull /data/media/0/exports ~/Desktop/wahoo_exports with the last part being the folder you want to save to. This will export every single ride to your PC. Your deleted ride(s) will be there. Look by the date.
  5. You can now sync the deleted ride. I airdropped the deleted ride to the ELEMNT app. That was enough for it to sync.

Adding complexity to a system does not make it more valuable

Every month, my company spends about $50K on software development. We’ve been doing this for 10 years. We think that we’re building something valuable well into the future.
Yet if the company went bankrupt, our work will instantly become worthless. Our business system serves our unique needs and would be useless in any other context. Likewise, if enough senior developers left at the same time, the business might be OK, but without in-depth knowledge, we would have to start over with the code.
Our code only has value when it makes money for the business. Like a living being, it only has value when it contributes to a common purpose (profit) and begins to disintegrate the moment that purpose is gone.
One difference between living and constructed things is that all of the parts of a living being are usually necessary for its function. If you remove any part of it, you will kill it, or at least imperil its ability to survive.
A complex codebase on the other hand usually serves multiple goals, and these goals change over time. Inevitably, some parts of the system become irrelevant to the system’s well-being.
98.5% percent of human DNA does not code for any proteins. It’s “junk” DNA. While not entirely useless, it’s a relic of evolutionary history. Given enough time, the same happens with any codebase.
This month, I tried to remove a feature from the codebase. It’s a small and simple feature, but one of the oldest. I found that I couldn’t get rid of it. Various parts of our system made certain assumptions that broke when the feature was removed. Subtle interactions caused things to break in unpredictable ways. This feature had wormed itself into the deepest layers of the logic engines and removing it broke dozens of unit tests.
I gave up and put the feature back in the backlog. I considered paving over the complexity by hiding it from the user, while letting it run in the background, like a vestigial organ. In fact, the feature had never been useful, but it took years for the business to admit that the tens of thousands spent on it were wasted. If we had recognized this earlier, stripping it out would have been much easier.
Adding complexity to a system does not make it more valuable — it makes it more costly to maintain. Humans have high-calorie needs because our brains require a lot of energy to run. Nature didn’t give us the largest brains it could, but the smallest brains that we could survive with. Human brains are mostly full of heuristics that provide shortcuts to perceiving and simulating reality just well enough to keep us alive long enough to reproduce. Likewise, software systems should have the minimum complexity needed to satisfy business requirements.

Three problems with the science of The Tomorrow War

Here are three problems I have with the science of The Tomorrow War:

1: On the proper use of time travel

Time travel requires the creation of a closed timelike curve (CTC): a closed loop in which spacetime returns to the starting point.

Let’s assume that a CTC is possible (an open question in physics), and it allows a single signal (yes=signal, no=no message) to be sent to a time machine that’s already operating, after which the connection ends. What can be done with this low bandwidth connection?

Say your goal is to win the lottery. You start your chrono-receiver and buy a lottery ticket. If you win, you send a yes. If you don’t get a signal, you increment the lottery number and try again. Even if your chance of winning is 1 in a billion, you will eventually get to the correct number.

What do you do after winning the lottery? Solve the next problem. Anything that is physically possible for you to becomes trivial given enough attempts. You just need to build an Ideal Solution Database (ISD) to keep track of successes and ensure each attempt is unique. You are using the CTC to perform computation on an infinitely powerful computer. You can’t go back to before the time machine was invented (that’s how a CTC works), but you can optimize your action post-creation to achieve any and all outcomes that are physically possible. (If this is confusing, watch the Rick and Morty episode “Edge of Tomorty: Rick Die Rickpeat”)

Where does the energy for this process come from? Where does the entropy go? From a thermodynamic perspective, time travel is problematic, whether you want one trip to make sure your parents have that first date, or a quintillion trips to become God-Emperor of Earth.

So this is the basic problem with all time travel in fiction. Even if you don’t set out to create the ISD, the temptation of optimizing any action leads toward the creation of an ISD. As each goal is achieved, the next goal is brought forward in time. The only limitation is the time to record each goal in the ISD, and the process can be used to optimize the ISD too. History compresses into a singularity and the flow of time as we know it ends.

While the time loops may be infinite, the ISD calculations and actions still generate entropy, so the ISD civilization has an expiration date. Assuming the civilization remains in a particular area of space (such as a solar system), it will perform all work possible until reaching heat death. From the perspective of an outside observer, the ISD civilization accelerates to a singularity, then vanishes.

If a CTC is impossible, what’s the point of this speculation? All intelligence tries to approximate a CTC+ISD. When you try to throw a basketball into a hoop, you first create a simple model universe in your mind that simulates the trajectory of the ball, then test the hypothesis by shooting the ball. You repeat the process, using simulation and testing to perfect the ISD in your mind. All intelligence works by running simulations, testing them, then creating a solutions database from the results. Unlike a CTC, each iteration has takes time and uses energy. To minimize this cost of simulation, civilizations are likely to trend to ever more efficient computing, bound only by Landauer limit, the theoretical lower bound on energy consumption.

Currently, we recognize a big difference between simulations (whether in our mind, computer software, or a physical system, such as a wind tunnel) and reality. However, a future civilization which exist entirely as software, and may convert the fabric of reality into computational substrate (aka comptutronium) may not recognize such a distinction. If the Landauer limit is somehow overcome, future civilizations will achieve what is effectively a CTC+ISD.

#2: On the threat of invasive species

Earth already experienced a great extinction from an invasive species 2.4 billion years ago that killed 99% of all life on earth. It produces a chemical that was highly toxic to nearly all other lifeforms. That phylum is still the most plentiful lifeform on earth. (That chemical is oxygen and the lifeform is cyanobacteria.)

Today, we are still dealing with lifeforms that are constantly trying to convert the entire biomass of the planet to copies of themselves.

Can you guess what that lifeform is? It’s every single living organism, from the smallest bacterium to us humans. Every organism has evolved over billions of years to optimize the conversion of inorganic matter and other living organisms into copies of itself. The introduction of a new, alien species that dramatically outcompetes other lifeforms in every ecosystem on a purely evolutionary basis would be a quite difficult problem.

To take a small flaw as an example: the “White Claw” invaders in the film can take down top predators – and they can also glide. But flight requires light, hollow bones, whereas brute power to take down large animals and throw military vehicles like matchsticks requires massively strong bones and bulky muscles. The laws of physics constrain all life to specific ecosystems because all life faces all sorts of compromises.

#3 On the proper use of intelligence

In The Tomorrow War, the invaders compete with humans by a non-intelligent (or at least low-intelligence), non-tool using species. Whatever consciousness they have, the White Claws presumably do not adapt strategy or technology to the human responses.

This summer, I’ve been trying to get rid of weeds in my backyard. At first, I tried pulling them by hand, but they grow back. Then I tried an edger, but it does not destroy the roots, so they grow back quickly. Then I tried 30% concentrated vinegar, and it works because it’s absorbed by the roots and kills the plant. While the weeds might eventually adapt to vinegar, the point is that I can change technology much faster than the weeds can evolve new defenses.

Humans have been dealing with invasive species for as long as agriculture has existed. Our key weapon in the fight is our technology. We determine which strategy works and then scale it up. We don’t keep using the same failed methods (small arms fire), like the protagonists of The Tomorrow War.

What should we have done to deal with the White Stripes? Well, wasting resources to firebomb them when they already dominate an ecosystem is stupid. Instead, all initial resources should have been spent to identify a viable defense method, then scale it up. Even within the movie, it only took a day to find a toxin — why did they only think of that in the last gasp of the war? If not a toxin, then what about armored vehicles? Here’s another problematic aspect of big dumb animal invader science fiction: living beings are still made of blood and guts. Physics puts upper limits on density and power so that a tank will always be able to take out a biological being — and do it beyond line of sight.

A small, hidden invader is much more difficult to defend against. A virus, bacterium, or even something mosquito-sized is a much scarier threat than a big dumb animal. Mosquitos have been around for over 200 million years, and their victims still haven’t been able to mount an effective defense.

Top ten ways you can appear rich even when you’re poor

1: Be fit and slim: there is a strong negative correlation between wealth and obesity. Why?

Contrary to popular belief, the rich are not slimmer because a healthy diet is more expensive or they can afford personal trainers. They are slimmer because they invest more thought into what they eat. This is because the wealthy have a lower time preference: they are willing to forgo the short-term pleasure of a sugar rush for the long-term reward of truly delicious food, good health, and good looks.

In developed countries where calories are cheap, our choice of food is determined by three factors: stress, culture, and availability.

Stress is the main determinant of time preference with food. Chronic stress makes us unable to make intelligent decisions about diet, and dietary sugar is the main pharmacological compound we used to deal with stress. Sugar and other processed carbohydrates are the main cause of obesity. For non-athletes, exercise has nothing to do with it.

There is much more to say on this topic, but to sum up: if you can learn to manage your stress, you will learn to manage your cravings. You can choose to develop a culture of cooking real food, and even though good food will not be as available to you, you can learn to go out of your way for it.

2: Wear well-fitting clothes: the rich are not fashionable because they can afford luxury brands. They are fashionable because they are conscious about fit and style. You don’t need to go to a bespoke haute couture tailor to dress well: you can find something that fits you at Goodwill. You just need to do free online research and make a conscious effort to design your wardrobe.

3: Show up on time: this is not to say that the rich are always punctual and the poor are late, but that the wealthy can afford to be physically and mentally present for occasions that they deem worth their time. The poor are usually distracted and either physically or mentally absent.

Like with diet, the root cause is stress: it’s much easier to be present when you can throw money to make your distractions go away. But if you’re poor, there is something else you can throw away to make your stressors go away: attachments. All relationships and possessions cost time and money. Some relationships and possessions are worthwhile and produce a positive return, while others are a net drag. When you are poor, it’s much easier for minor things to drag you down, so you must keep your load to a minimum. Partying is expensive. Owning a car is expensive. Owning the latest iPhone is expensive. Let go of attachments that are not vital to your long-term success and you will thrive.

I didn’t have a car until I got my master’s at 23. It’s not that I couldn’t afford or didn’t want a car (living in a small Texas college town). I knew that it would be an ongoing cost and a distraction from my main goal of completing my education.

4: Be young: no amount of wealth will give you a younger body, but you are in control of the two biggest causes of aging: obesity and sun damage. You may not be able to afford plastic surgery, but you can control the main reasons why the rich need plastic surgery in the first place.

5: Have a big family: while there is a strong relationship between poverty and more children, the cost of raising kids is one of the main reasons parents don’t have more children.

Children are expensive at all income levels since the expectations on parents grow proportionately. But I think the problem is the same: parents think that being good parents means spending money on their idea of a good parent rather than spending time being a parent. For example, in my family, we took our daughter out of an expensive private school because we found that she learned more from us at home. We don’t spend our time shuttling her from one activity to another, but go hiking, play chess, and cook together. Being a parent is cheaper and more rewarding than hiring someone else to parent your child.

6: Have a successful marriage: There is a very strong relationship between divorce, single parenthood, and poverty. Why do the poor get divorced more often? The root cause is an inability and unwillingness to negotiate conflict: all relationships take work and generate stress. Successful couples can take time to do the work because they manage their stress. Couples who divorce let stress and resentment build up. It is said that the overwhelming reason relationships fail is “lack of commitment.” But why are people not committed to relationships? It’s because it does not create value for them. Once the sensual aspect wears off, the inherent friction of human relationships overweights the positive aspects of the partnership. Poor people divorce for the same reason they get fat, and it has nothing to with money. The root cause of poverty, obesity, and divorce is high time preference.

7: Don’t complain: Wealthy people are happier, while the poor are much more likely to be depressed. Part of the reason is that they can throw money at problems. A more fundamental reason is that the poor have a scarcity mindset, while the wealthy have an abundance mindset.

The abundance mindset sees the universe as full of opportunity — for friendship, love, and financial success. By contrast, the scarcity mindset sees everything as a fixed pie and leads to hoarding, envy, and stagnation in every aspect of life.

Poor people with a scarcity mindset think that if their neighbor has something good, whether it’s a possession or relationship, it must be unavailable to them. So they complain about the cruel, unjust universe.

Wealthy people with an abundance mindset see others’ success as an inspiration: if their neighbor has a great marriage, a beautiful house, or a successful business, there is something positive to learn, and potentially a valuable relationship to build. The universe is full of opportunities, so there is no reason to complain about failure – they have only themselves to blame.

8: Enjoy great art: while the rich can afford an original Banksy their wall, and will.i.am at their kid’s bar mitzva, the world’s greatest paintings are in public museums, and great music and film are nearly free for you to enjoy — if only you developed a taste for it.

It is said that Howard Hughes once locked himself in a hotel room and watched Ice Station Zebra for months. If I developed an OCD desire to watch a movie on repeat for months, it would the 2003 film “Master and Commander.” I’ve heard some people complain that the film is boring and doesn’t have enough action. Once again, high-time preference is at fault. You are addicted to crave the rush of sugar in food, the cheap dopamine thrill of pornography, and the freight train of explosions in the latest Michael Bay Transformers 7: Faster and Exploder.

Nurturing a taste in great art takes patience and time, but if you want to explore the highs and lows of the human condition and be inspired to be a deeper, more passionate soul, you must put in the time and work.

9: Keep a clean house: yes, the wealthy can hire housekeepers to pick up after them. But if you’re poor, you have an advantage they don’t: you have fewer possessions and less space to store them in.

While weekly cleaning is necessary for every household, being organized is more important: by putting things away after you use them (and teaching your kids to do the same) you can keep your home from becoming a mess in the first place.

The messy appearance of poor households has another cause: the scarcity mentality. People hoard things they don’t need because they worry that they won’t be able to get a hold of them again. But possessions you don’t need right now are only a drain on you: they take up physical and mental space in your life. Let go of the things you don’t need with the faith that they will be there when you need them again. There are “Buy Nothing” neighborhood groups all over the U.S. where families freely exchange things they don’t need anymore. This year, I got a punching bag, a shop vac, a kids trike, lightning for my garage, toddler clothes, yard tools, and much more. We gifted just as much. Relying on relationships and having faith in people’s generosity frees us up for physical and mental baggage.

10: Don’t stress about money: in developed countries, stress about money is the worst aspect of poverty, worse than the physical deprivation it forces. Few people in America have to worry about going hungry or homeless, but many more live paycheck to paycheck with chronic stress about money. A $500 surprise expense would put most Americans into debt.

A high income is no guarantee of financial well-being: if your spending rate is greater than your income, you will never have financial security. Real wealth is not measured in income, but financial security: the confidence that no matter what happens to your income stream, your lifestyle won’t be affected.

The solution to money stress is simple: live below your means and build an emergency fund. It’s easier not to stress about money when you’re young and broke. When you’re starting out, all you need to worry about is living below your means and keeping your emergency cash fund topped up. When you’re wealthy, very little of your net worth is cash. You have to balance your net worth between business interest, real estate, securities, and other assets. Managing your portfolio becomes a part-time job – unless you hire expensive money managers, which is another set of worries.

Conclusion

Wealth is one possible reward for developing good habits in life. It takes time and luck to build wealth, but you don’t need to wait to become rich to enjoy the other rewards that result from striving for physical and mental health.

  • Find life-enhancing ways to manage stress (such as sports or hobbies rather than food, porn, drugs, or tv)
  • Eliminate relationships that drag you down and distract you from your life’s goals
  • Put as much thought into your appearance as you do into other important aspects of your life
  • Make a concerted effort to nurture your soul with great art
  • Eliminate possessions that do not bring you joy or add more value than the financial, physical, and mental burden they carry
  • Live below your means to avoid financial stress

Bitcoin has already advanced global privacy and financial autonomy

If Bitcoin and other cryptocurrencies were to disappear tomorrow, what legacy would they leave behind?

I can think of three main impacts:

First, Bitcoin raised awareness of the flaws in fiat money, the superiority of sound money, and the potential of people to trade with each other without third-party intermediaries.

Second, Bitcoin has provided a life raft to millions of people under regimes suffering hyperinflation (like Venezuela), confiscation (like India), or currency export controls (like China). These people have been able to safeguard and use their savings.

Third, Bitcoin has advanced the state of cryptography, from a plaything of spy agencies and banks to a ubiquitous privacy layer securing the information of the entire world.

While each of these points could be an essay, I want to focus on the third impact today, starting with the state of cryptography before the invention of Bitcoin.

In his 1988 “Crypto Anarchist Manifesto“, Timothy C. May introduced the concept of crypto-anarchism, the idea that ubiquitous encryption would allow total freedom of trade by blocking the ability of governments to spy on and thus interfere with markets.

Inspired by his essay, thousands of aspiring “crypto-anarchists” (like me) installed software like PGP/GPG and tried to bring about the revolution. Then we ran into a few problems:

First, the software was way too complex for laypeople to use. Only dedicated hackers have the ability and patience to encrypt our communications. As long as only a few cooky radicals used cryptography, there was no incentive for merchants to adopt it. Likewise, email and messaging platforms were not encrypted, and using encryption branded you as a radical, and maybe even a criminal.

Second, the public did not believe in the potential of encryption. This was for two reasons: First, cryptography was seen as something for the NSA and CIA, not the public. Until 1992, cryptographic algorithms were on the U.S. Munitions List as Auxiliary Military Equipment. While using encryption within the U.S. was protected by the first amendment, it was illegal to export strong encryption outside the U.S., which crippled the commercial cryptography market. Second, it was believed that hackers could break cryptographic algorithms — it was simply a matter of applying sufficient computational power. To some extent, until the adoption of AES in 2001, this was true.

The third problem we ran into was conducting an anonymous exchange. There was no way to transmit value without eventually involving the legacy financial systems, which were becoming less and less anonymous. Efforts to create a digital proxy for gold such as e-gold and e-Bullion survived for a time, but were shut down by the U.S. government around 2009. The Foreign Bank Account Report of 2010 was part of a wave of global regulations which ended banking secrecy worldwide.

This context is important to understand the import of Bitcoin’s invention in 2008:

Until Bitcoin, the entire field of cryptography lacked strong real-world validation. While the banking industry used things such as RSA tokens and browsers used SSL for decades, their security was unproven. Because it is generally possible to reverse or void legacy financial transactions, the financial industry does not face a strong motivation to ensure the integrity of its cryptography.

This skepticism was validated when the National Security Agency was proven to have secretly weakened the RSA standard, and that vulnerability was exploited against major U.S. corporations in 2011. Additionally, documents leaked by Edward Snowden showed that the NSA had aimed to subvert cryptography standards.

As Bitcoin’s market cap grew from $0 to over $1 trillion today, larger and larger sums were protected by cryptography. For the first time, there was actual value behind cryptographic algorithms, and the entire field of cryptography began a rapid evolution. A $1 trillion prize is available to anyone who can subvert the security behind Bitcoin. This is an enormous incentive to advance the entire system of cryptography, from better algorithms to the ecosystem of software and hardware devices.

In 2021, the entire world has moved online. 67% of the world’s population has a mobile device – nearly all adults, and quite a few children. Within a decade, nearly all of those users will use a smartphone, which facilitates not only voice conversations but embedding all aspects of one’s life – business, shopping, education, romance into the global Internet. Thanks to advances in cryptography, we’ve seen the vast majority of that communication moved from plain-text to encrypted networks. With the notable exception of Chinese platforms, the most popular apps now use P2P encryption. WhatsApp, Telegram, and Signal are end-to-end encrypted, so no individual or government can spy on them. (Apple iMessage is E2E encrypted when iCloud iMessage backups are turned off). VPN networks have gone from corporate and esoteric to cheap and ubiquitous. In 2011, I struggled to set up my VPN while living in China to evade censorship. In 2021, in the U.S. I use my home VPN like millions of other Americans to enhance my privacy. It’s fast, invisible, and costs under $2/month.

Today, all my computers and backups are encrypted, and they come with hardware-level encryption so that there is no impact on performance. I secure my access to Google, Facebook, and other popular services with U2F hardware tokens. My Bitcoin is secured by hardware wallets that incorporate plausible deniability and multiple cryptographic signatures.

While we can’t simply give Bitcoin credit for all these achievements, embedding value in communication networks has been the single most powerful incentive for the world to step up its security game.

Observe that after the NSA paid RSA $10 million to backdoor the security tools used by the world’s largest corporations, it took from 2006 to 2013 for the world to exploit the flaws in RSA. By contrast, cryptocurrency exchanges and custodians are a much more lucrative target, and thus face much stronger pressure to keep evolving their security practices. When Northrop Grumman was hacked with the RSA exploit, some Chinese or Russian agent received a promotion, whereas the hackers of Mt Gox, Binance, and dozens of other exchanges were set for life, with little fear of repercussions.

Today, I am a lot more skeptical that ubiquitous encryption will bring about Timothy May’s dream of a crypto-anarchist utopia. However, I think there is a very good case that the invention and adoption of Bitcoin has dramatically advanced global privacy and financial autonomy.

Why GameStop is not the new Bitcoin

When Robinhood disabled customers from buying GameStop, some people in the WallStreetBets subreddit suggested a need for a “decentralized brokerage.” Others said that “GameStop is the new Bitcoin.” Yet others decided to target the Dogecoin cryptocurrency, which spiked over 500% before it failed to process transactions due to overload.

The premise behind these ideas is hilariously wrong, but it’s worth exploring why.

It’s not surprising that young people growing up in the age of decentralized and censorship-resistant cryptocurrency exchange expect stock exchanges to be decentralized and censorship-resistant too.

Stock exchanges do exist to make business ownership accessible to everyone. Unfortunately, while trading stocks has become much cheaper and easier thanks to technology, the value of owning stocks has fallen dramatically.

To be listed on a stock market, a company has to pass many very expensive regulatory hurdles. But by the time a company goes public, much of the risk (and therefore profit) has been taken by venture capitalists and private equity investors.

The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and 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 US. 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. It’s no wonder people are looking at cryptocurrencies for more risk and return.

Back to the idea of a “decentralized exchange.” We think we own the stocks we buy, but that is not legally true. Cede and Co. legally owns all publicly issued stock in the United States – over 50 trillion dollars worth. It processes over $500 trillion and 325 million trades in these stocks on behalf of individual investors. New York State appointed Cede as the central securities depository in 1973, and all stock exchanges settle their transactions there.

You might think that when you buy a stock, Cede enters your name in a ledger somewhere, but that’s not true either. Cede only records the “street name” — the name of the brokerage which holds the security. The brokerage (ETrade, Robinhood, etc) is responsible for tracking who has rights to shares. You can request to get paper share certificates issued on your name (like investors used to get), but no one does this anymore.

This is a very simplified version of how stock ownership works, but I hope you can see why the idea of a “decentralized brokerage” is absurd.

On the surface, a centralized cryptocurrency exchange work in a similar way. When you buy Bitcoin on an exchange, you get a right to some amount of cryptocurrency. Until you withdraw it to your wallet, you only have a claim to your assets.

The big difference between a share of Gamestop and Bitcoin is that you can take purchase and take possession of Bitcoin without any intermediary. Whether you use a decentralized exchange, buy from a friend, or mine it yourself, no approval is needed for the transaction, and no authority can block the trade or take it away. It’s also impossible for anyone to devalue your Bitcoin by issuing more of it beyond the set mining rate.

These are the real reason why Bitcoin has value. Eventually, the GameStop share price will fall back down to reflect its fundamental nature as an outdated and failing business model, while the Bitcoin price will keep rising as users validate its fundamental nature as an alternative to the failing system of central banking.

What about Dogecoin? If the whim of the members of an investing community drives cryptocurrency prices, can Bitcoin achieve any kind of long-term stability? The Dogecoin outage is a clue.

The Doge network does not have enough nodes to process transactions. The reason Bitcoin has been able to hold a dominant market share since 2009 is that it has the biggest ecosystem of miners, users, and service providers. Unless another cryptocurrency obtains a compelling technical advantage, and the Bitcoin network is unable or unwilling to match it, Bitcoin will keep its lead.

Don’t panic: why Tether won’t destroy crypto

This article by “Crypto Anonymous” claims that Tether will bring a crypto “doomsday.” The author makes many good points in building his case, yet the overall conclusion is less than the sum of its parts.
Here’s the short version of why he’s wrong: Yes, Tether creates systemic risk for Bitcoin. But the key claim that new Tethers are fraudulently created without dollars to back them is pure speculation. Furthermore, the impact of a Tether collapse decreases as the ecosystem grows, so there’s no need to be “frantic” about a “crypto doomsday.” Finally, stablecoins like Tether should not be confused with true cryptocurrencies like Bitcoin, which do not fall in the same category of risk.
Speculation about whether Tether is backed by dollars has been going on almost since the currency was created in 2014. Tether is the primary onramp to buying cryptocurrencies on many exchanges, so during Bitcoin bull markets, Tether issuance does too. This fuels speculation about whether Tether is backed by dollars. It’s a fair question to ask. But note that Tether honored withdrawals from 2017 to 2018, when the price of Bitcoin fell from 20K to $3.2K. Total market capitalization decreased from $821 billion to $105 billion, and Tether’s market cap fell from 2.8 to 1.6 billion. I question the accuracy of all of these numbers, but it’s clear that Tether weathered a major selloff.
At this point, everyone in the know has accepted that Tether is less than 100% backed by dollars, but as long as the crypto selloff is not too severe, it has enough reserve to weather most storms. Even if Tether comes up short and becomes unable to honor all withdrawals, a partial devaluation will result in a haircut for Tether holders, not a doomsday for a market that is used to huge day to day swings.
Let’s speculate on a key question: if Tether isn’t a fraud, why don’t they perform an audit and come clean about their books? The answer is that crypto occupies a legal gray area, and exposing all their accounts would put Tether’s banking relationships at risk. Until about a year or so ago, banks categorically avoided any crypto business. They would close accounts of consumers who wired money to crypto exchanges and scan peer to peer payments for any mention of crypto. Legitimate crypto entrepreneurs had to stash vast amounts of cash like drug dealers cash because they couldn’t maintain any bank accounts for long. My partners and I were very fortunate to have relationships to open a bank account for our hedge fund in 2017.
Now imagine how difficult it would be for Tether to store billions of dollars in a fully disclosed manner. It’s clear now that Tether decided to obscure their banking relationships and use less-legitimate partners, and lost some of their funds as a result. Today, fully audited stablecoins such as USDC and USDG compete with Tether, but their market share is still a minority.
Regulated stablecoins are a great solution for many, but not all. For a stablecoin to be audited, their banking partners require strict KYC, and exchange partners that redeem those coins must obtain government licenses. This means that there is an ongoing demand for stablecoins that can be redeemed in a less-regulated environment. This is one of the reasons why Tether is so popular: it helps crypto traders work around currency controls in various Asian countries, especially a big one that starts with C. The other reason is that Tether allows less-regulated exchanges to exchange in leverage, market manipulation, and other practices that regulated exchanges can’t get away with. Still, the bottom line is that stablecoin competition is great and lowers the overall systemic risk posed by Tether.
Finally, a stablecoin like Tether should not be confused with Bitcoin. There’s no doubt that market manipulation, massive leverage, and fake trading numbers dramatically inflate the demand for crypto and market cap numbers during each bull run. However, unlike a Ponzi scheme, Bitcoin recovers after each crash, even as most other cryptocurrencies falter. Bitcoin serves a practical purpose and that in turn, drives legitimate long-term investors and institutions to Bitcoin.
Tether may collapse one day. But with ever-growing competition from audited stablecoins, there’s no reason to think that it will take the entire crypto market with it, that it will happen soon, nor that Tether holders will be left with nothing.
2022 Update:
A year later, Tether and Bitcoin are doing better than ever. Furthermore, Tether now represents a minority of stablecoin holdings, with the new players being fully audited and even US-based. Tether publishes details about its holdings and has completed *seven* independent audits that confirmed that Tether is indeed fully backed. (I tried to link to their audits, but Facebook blocks it as “spam”)
But most importantly, what all critics missed is that Tether *had* to be secretive about their holdings because creating a stablecoin had no legal precedent. Tether pioneered the field and made it possible for all of its fully-regulated and compliant competitors to exist.
Regulators are hostile to innovation, and entrepreneurs often have to take risks and prove that their ideas are sound before their business model is accepted as legitimate.

Stimulus checks are a dangerous game

What happens when the government sends out a stimulus payment? Politicians can print money, but they cannot wish all the goods and services that money buys into existence. They would like you to think that their money causes factories to hire workers and put idle production lines to work. But that’s not what happens.
 
Tens of millions of employees and warehouses full of raw materials are not waiting around for stimulus money to put them to use. What were those people, factories, and raw materials doing before the stimulus?
Absent government intervention, they were putting their time and capital into the most profitable ventures they knew.
 
Stimulus money can boost consumer spending in the short-term, but it cannot command the resources needed to produce goods and services into existence. The short-term boost in consumer spending comes at the expense of long-term economic destruction.
 
Here is what most people (and economists) don’t understand: When the government creates new money, it can only create a short-term boost in consumer production at the expense of eroding the capital needed to produce those goods. “Capital” is all the things that make consumer goods and services possible: factories, farms, bridges, trucks, trains, and cargo ships, sewers, mines, warehouses, and so on. By printing money or lowering interest rates, the government steals from savers to pay spenders. Those savings are what pays for capital maintenance and expansion. Without savings, factories can’t maintain or expand production.
 
Worse yet: the new money is not distributed evenly but goes mostly to those with political connections rather than successful or innovative businesses. Taxpayers get a shiny check, while trillions more go to cronies.
 
The result of long term monetary manipulation is infrastructure rot: factories, bridges, buildings that crumble, and an inability to invest in research and capital expansion. The government makes money available to consumers and investors, but it cannot dictate new people and machines into existence. The stimulus causes new big-screen televisions to show up in department stores, but the VR headsets that the stolen capital would have produced never come to exist.
 
Printing money is addictive: once one politician sends a stimulus payment, they raise the bar for everyone else. Unless voters revolt at having their savings stolen, the game keeps escalating: print just enough money to win votes without collapsing the economy.
 
For nearly 100 years, the U.S. government has been running all sorts of welfare programs for the rich and poor alike. It has been able to sustain those programs because technological progress and capital accumulation expanded productivity just enough to keep up with the increased burden of the welfare state. It’s a dangerous game of brinkmanship: steal just enough from producers to win the next election, without causing an economic recession that causes voters to change sides. The game keeps escalating as politicians find more and more ways to steal savings and redistribute the loot.
 
For example, using the COVID-19 pandemic as an excuse, the government started buying corporate bonds, running huge permanent deficits, reducing the bank’s reserve requirement to 0%, and now, sending increasing large checks directly to the public.
 
How does this game end? All monetary manipulation creates economic destruction, but as long as the world’s major central banks move roughly in tandem (as they have been), the destruction goes unnoticed. However, the heavier the government burden, and the more reckless and inflationary policy, the more fragile the economy becomes. 9/11, the 2008 financial crisis, and the 2020 pandemic were all used to justify massive expansions in government programs. Now that voters have gotten a taste of direct cash payments, we’re entering a dangerous new phase. The coming escalation of fiscal irresponsibility is predictable and inevitable.
 
So is the economic correction that will follow when capital is looted to such an extent that economic production collapses, and the government can no longer pay for welfare programs or maintain its debt. Whether it’s a terrorist attack, another pandemic, or something else entirely, the next “emergency” could push the economy beyond recovery.
 
The only question is what happens then: a return to sanity or the end of the U.S. as a superpower?

Being Pro Liberty Shouldn’t Mean Being Anti-Science

My social feed is full of deeply flawed arguments about the science of COVID-19. It’s in the mainstream media too, but it bothers me more when I see it coming from my libertarian friends and organizations.
 
I used to be likewise “triggered” by libertarian and conservative writing about global warming. Leftists would probably call me a “climate change denier”. In reality, I have always been modest enough to know that I’m not qualified to debate climate science. I hope that comes through in my very first writing on the topic in 2007.
 
Likewise, I am humble enough to know that I’m not a doctor, an epidemiologist, a statistician, or a scientist. (Furthermore, being a professional scientist is not an automatic qualification to be an expert on fields outside one’s specialty.)
 
It’s is not a sin to abstain from taking a position on matters one does not fully understand. We are not obligated to express an opinion on the vast majority of issues. It’s acceptable and appropriate to admit ignorance on questions on which we cannot form an educated opinion and focus on topics that are more relevant to our lives. It is wrong, however, to attempt to inform others without having an educated opinion first. In the words of Frédéric Bastiat,
 
“The worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended.”
 
Do you need to be a climate scientist to comment on climate change or a doctor to comment on facemasks? That depends on the context of your argument.
 
There are some matters on which all adults are morally obligated to have an informed opinion. If you see a man snatch a purse on the street, you don’t need to be a philosopher specializing in ethics to shout “thief, stop!” Social existence requires consensus among the majority on some basic ground rules – be polite, wait your turn, presume goodwill, return your shopping cart, respect personal boundaries, etc. If someone proposes violating one of these rules, it’s enough to point it out as prima facie wrong.
 
Back to global warming: I’ve mentioned my objection to non-scientists pretending to have an informed opinion with ridiculous arguments such as
“but water vapor creates more warming than CO2!” But that works both ways. In “An Inconvenient Truth,” Al Gore claims that the sea level will rise 20 feet “in the near future.” The International Panel on Climate Change predicts a rise of 0.59 to 2.0 feet over the next 100 years. I’m not qualified to judge either number, but neither is Al Gore, and I can call him a liar when he cites numbers that have no basis in the scientific consensus.
 
More importantly, while I’m not qualified to debate the science of climate change, I am qualified to share opinions on political and economic matters. It’s not because I have degrees on the subjects, but rather because I got degrees in both subjects because of deep interest and years of research on political theory and economic principles. I don’t need to debate the science of climate to point out the benefits of industrial society, the morality of exploiting nature to further human flourishing, the reduction in suffering from natural disasters made possible by the economic development that the environmentalists now want to curtail. I can also show how developed nations are more capable of adapting to a constantly changing climate and environmentally conscious than primitive and developing societies.
 
There is a lot more than I can say on the matter. Still, I hope you can see that I focus on topics I (1) build arguments from basic principles that most people can agree on (2) point out when others make claims not consistent with scientific consensus and (3) focus on areas of personal interest that I’ve personally educated myself on.
 
With that context in mind, let’s return to the topic of COVID-19. It’s absurd that the question of hydroxychloroquine’s efficacy has become a political issue. We need evidence-based medical research precisely because anecdotal evidence can be so misleading. I have no time, interest, or ability to stay on top of the latest medical research. If I get sick, I will go to a medical professional who practices evidence-based medicine and trust them to make sound decisions.
 
What I am qualified to write about (and have at length) is the government’s destructive economic response to the pandemic, the importance of local decision-making in medicine, the harmful consequences of central planning in responding to the epidemic, and the moral right of people to make decisions about their health.
 
I’ve also covered the benefits of universal mask-wearing — according to the scientific consensus and empirical evidence. I’ve advocated for private property rights – the right of businesses to kick out people who refuse to wear masks, and their right to decide how much risk and liability they are willing to tolerate.
 
Being pro-liberty does not require being anti-science, even when politics have corrupted science. Our adversary is usually the advancement of political goals through under a scientific guise. You should untangle the evidence from the politics and address flawed political ideas and goals rather than discredit your side by demonstrating your ignorance when you venture into topics you don’t fully understand.