Crypto, Money & Wealth
You can’t expect to become wealthy if you don’t know what wealth is.
What do you own?
Is a house an asset? What about a business? A yacht? A bank account? Stocks? Bonds? Cash?
What makes something an “asset” depends a lot on what kind of money you use. And, for as long as anyone alive can remember, the money we use gets created out of thin air.
By the Federal Reserve’s own admission, their “goal” is for you to lose 2% of your purchasing power forever. That is the Fed’s target inflation rate.
The reality is much worse.
There are a ton of ways to measure the “worth” of your fiat dollars. While most are familiar with the Consumer Price Index (CPI), that’s not the only way to measure the number of dollars it takes to do or buy a thing.
If you had $1000 in your pocket 100 years ago, this is what that $1000 would be “worth” today:
Meaning, $1000 from 1922 would be “worth” somewhere between $17,500 and $347,000 in 2022. The clever among you might notice the CPI, especially the CPI deflated for GDP, is the smallest number.
Even the little CPI number is not without skeptics. By one critical estimate, the CPI grossly underreports actual inflation.
Have a look:
So, who’s “right?” Is $1000 from 1922 worth $17,500, or $75,000 or $350,000? Is the blue line CPI accurate, or is it the red one?
Confused? So is every one else, including the goons at the Fed.
The purpose of all this confusion is to try and make it nearly impossible to tell just how bad you’re getting borked by inflation year after year.
Here’s a tip: You’re getting borked no matter what.
Keep it simple
How much purchasing power are we losing to inflation every year? As you can probably tell from the charts above, an accurate answer is unlikely.
Personally, I simply assume that the purchasing power of the dollars in my bank account are roughly going down at the same rate the S&P500 is going up.
That said, over the last 100 years or so, the S&P500 has gone up 73,561%. Which means, if you had invested $1000 in the S&P500 in 1922 and let your gains compound annually, you would have seen a 6.6% APY (annual percentage yield).
Of course, publicly traded companies should be making more than monetary inflation. If we assume that stock premiums above monetary inflation are 2% a year, then we might have a number that captures “real” monetary inflation.
Meaning, roughly speaking, while stocks have been appreciating (on average) around 6.5% a year, inflation has (probably) been running around 4.5% per year for the last 100 years.
And, if we assume that to be the “real” rate of monetary inflation (I do), then guess which numbers that just happens to line up with, if you bother to do the math.
Yup.
Your wages.
In fact, to arrive at those figures circled in red, loss of purchasing power from monetary debasement would be roughly 4.3% annualised. Put another way, if you started in 1922 with $75,000 in cash, a 4.3% per year loss in purchasing power would bring you to $1000 worth of purchasing power today.
Here is the bigger problem though: The majority of the loss of your purchasing power has only happened in the last 50 years.
Take a look:
It’s a little hard to see, but the little, tiny, thin blue box on the chart shows the gains in the S&P500 from 1922 to 1972. During that 50 year period, the S&P500 rose 1330%.
The rest of the 73,651% gain has happened after 1972. Golly gee, you might ask, what happened in 1972?
We went off the gold standard.
Or, at least, the Bretton-Woods version of the gold standard. It was basically around the time Uncle Sam rug-pulled the world.
Since we went off the gold standard, the Fed has adopted the “fake it until you make it” standard for wealth creation. That came into full view after the global financial collapse in 2007.
In fact, of the 73,561% S&P500 gains over the last 100 years, the majority of that gain happened after 2007. Meaning, in the last 15 years.
Trouble is, it takes time for all that Fed created funny money to work its way through the system. What happens is roughly captured by the Cantillion Effect.
Put simply, the further away from the money printer you go, the less the money can buy. And, since your wages are at the very bottom of the money supply, wage earners get rekt most last.
Life under the funny money standard
Which brings us back to the topic at hand: crypto, money & wealth. If you live in a country that prints money out of thin air (all of them), then in order to become wealthy, you need to acquire assets.
That said, not all “assets” are created equal. An easy rule of thumb to know if something is an “asset” or not is to ask yourself if a wealthy person would want to invest in it.
Of course, wealthy people own all kinds of useless junk. This is not to say anything a wealthy person would buy is an asset.
Here is how I would sum up the difference.
The average lottery winner in the United States will be bankrupt within three to five years. There are a lot of reasons for this, but high on the list is wasting money on junk.
Meaning, if you hand an average Joe or Jane a check for $150 million, the first thing they do is go out and buy stuff. Cars, luxury houses, watches, expensive vacations, boats, etc.
But, if a wealthy person gets a check for $150 million, they usually go buy assets. Those assets tend to be things that:
- Go up in nominal (paper) value as the money supply increases;
- Generate an income stream; or
- Both.
Put another way, poor people buy things that cost money. Rich people buy things that either make money, or appreciate in (paper) value.
And, if you live in America today and you don’t already have real, honest-to-goodness assets, then you are falling behind with every penny you save.
Is crypto an asset?
Would a rich person want to invest in Bitcoin? Maybe.
Some (often, very) wealthy people already invest in Bitcoin. Regardless of how convinced they are about Bitcoin, or how convincing they sound about Bitcoin, Bitcoin is still speculative.
From where I sit, I think Bitcoin is a reasonable speculative play. As Satoshi himself said while he was inventing Bitcoin, the price goes up when people buy Bitcoin.
Likewise, if more people sell Bitcoin than buy it, the price goes down. There is no other magic formula for the price of Bitcoin. If everybody that owns Bitcoin sells it all at once, price goes to zero.
End of story.
While I think that is a highly unlikely scenario, it is still a possible scenario. What I think is more likely is that enough people will buy and hold Bitcoin so the price continues to go up. And, as more and more people buy and hold, it will become a safer and safer asset to store value in.
Much like a bank, as soon as there is enough money in the Bitcoin network, a bank run (where everyone wants to cash out at once) becomes less and less likely. There are some yet-to-be resolved issues with that idea (like wallet concentration), but as a general rule, it’s not completely bonkers to see Bitcoin evolving that way.
What about the rest of the crypto market?
Those are not assets yet. Every crypto token released since Bitcoin is essentially a meme coin. The people that create the crypto project come up with a story about how amazing their crypto thingy is going to be and they pitch that idea to whoever will listen.
To be clear, distributed ledger technologies are, in every sense of the word, revolutionary. But, for the most part, the revolutionary uses for distributed ledgers won’t necessarily need a “token” to work.
Right now, in almost every case, the “token” is a way for the developers to raise money.
That’s it.
For example, and like I pointed out in another article, Solana SOL tokens have roughly the same market cap as the company Roblox. However, Roblox reported earnings of $2.25 Billion in 2022 and has already crossed $2.68 Billion this year. By contrast, the Solana blockchain is bringing in (roughly) an annualised revenue of $15 Million.
What that tells us is, while Solana might be promising, the current “value” of the token is naked speculation on the Solana blockchain. The hope is that Solana is going to become so popular that more and more people will want to buy SOL tokens to use the Solana blockchain.
But, as it stands right now, Solana has 148k daily active users generating about $2.59 million in fees per month. So, even if Solana gets 10x the users, the fees will (likely) be about $25 million a month, or $300 million a year.
Which is a tenth of Roblox’s revenue for roughly the same number of active daily users. Like I said, most crypto “tokens” are for the developers to make money off speculators, not a representation of the future value of the chain.
Meaning, not an asset.
Crypto for wealth generation
As I said up top, to be wealthy in a country that prints money out of thin air, the only way to create wealth is to either:
- Buy things that expand in nominal (paper) value as the money supply expands; or
- Buy things that generate money as the money supply expands.
The trouble for most middle-income Americans, especially young people starting out, is the things that expand in nominal (paper) value are already very expensive in paper money terms.
Just to buy a house today will cost nearly 10 times the average American salary. Likewise, buying a stable, income-generating business is also very expensive.
So, as a young person trying to save to buy an actual asset, their ability to save gets diminished by roughly 10% a year due to monetary inflation. Meanwhile, asset prices continue to go higher and higher because of monetary inflation.
And, if things keep going like it appears they will, then the inflation is only going to get worse. I haven’t seen anyone proposing raising taxes or cutting spending. What I do see is a grossly irresponsible government printing money as fast as they can to pay for things we clearly cannot afford.
But, today is different.
Today, there exists a reasonable, but still highly speculative potential asset that (so far) generally expands with the money supply. In fact, of all the assets out there, it has expanded the fastest among all asset classes.
It’s called Bitcoin.
Now, if you are sitting on $500,000 in cash, you own five fully paid for rental houses and you have a stake in a profitable small business, then you already have assets. But, for someone who’s behind the curve and looking to catch up, Bitcoin is a potential solution.
It’s certainly not something one should go “all-in” on. It’s risky. The “Bitcoin is digital gold” narrative might not play out. And, it’s the one potential asset that is:
- Fractionable;
- Immutable;
- In (relatively) high demand; and
- Is about to go “mainstream”
The point is, right now, a large segment of the population is heading towards a permanent spot on the sidelines of wealth. The generation going into adulthood right now will have to work more and save for longer just to go deeply into debt to acquire a real asset like a house.
An alternative for them is taking the (very high) risk chance on starting a business. Certainly no guarantees there and failure rates among small and medium businesses are ridiculously high.
Or, they could just buy Bitcoin.
From where I sit, Bitcoin certainly seems much lower risk than starting a business. Likewise, Bitcoin also seems much less risky than pouring all spare cash into a highly-leveraged house that you may or may not be able to keep if you lose your job.
What’s left besides a house or a business? The “Magnificent Seven” stocks?
Good luck with that.
Conclusion
Unless and until we live in a system that relies on sound (non-inflationary) money, then money dilution will always be a problem for non-asset holders.
It’s quite literally why the system is set up this way.
All fiat monetary systems are designed to enrich the top, while slowly siphoning off purchasing power from the bottom. And, all fiat monetary systems fail because of that core design.
Whether or not Bitcoin, or any other crypto for that matter, becomes the foundation for globally sound money is a philosophical topic. Right now, what’s important is, the Bitcoin experiment may represent the first truly decentralised, opt-in asset class for the masses.
An asset class in which anyone can participate, whether they have $10 of disposable income or $10,000. Much like stocks are for the wealthy, the nominal price may fluctuate, but it appears (so far) that the overall trajectory is up.
And, it carries with it the incentive for the wealthy to expand their asset holdings as well. The point is, if you are a wage-slave right now, I think it’s bonkers to not be buying Bitcoin.
Not every penny you have, of course.
But, at least something.
One-percent, or five-percent, or even ten-percent. I’d say a good rule of thumb would be to at least devote as much money to buying Bitcoin as you do to wasteful spending like Netflix, going out to eat, or buying designer clothes.
The idea being if Bitcoin flops, then you were going to waste that money anyway. But, if it does what I think it will, then you will actually have a legitimate asset.
Which is the first real step to actually becoming “wealthy.”
These are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
