(updated 10/30 0600)
I initially quickly wrote this up on a lunch break but wanted to add a little more.
This article was inspired by a conversation I had on Twitter this morning while caring for a sick child napping on me. Had to do with the NFT market. Completely makes me lose my shit. So. Sorry for all of that nonsense. Somehow, bitcoin got thrown in the middle of this and someone accused me of not understanding money. And then it escalated to me calling someone a Karen. Always fun.
The big picture of this article was that I wanted to trash crypto a little in what they are getting wrong, but praise them for what they are getting right. While there may be subtle nuances here, not understanding what the hell you are doing in the long term can cost you a lot of money.
Full presentation of financial energy here. This might save anyone who invests in crypto a lot of tears down the road.
I have gone over this a bunch but want to beat people over the head with a stick with it. I did a deep dive on this and feel this concept needs to be fully understood before you spend one dime on any investment. I’ll boil down a few slides here which will give a back drop as to what I’m getting at.
First, someone told me I don’t understand money. If you look up the academic definition of this, they talk about things like fungible and “store of value” and all of that goodness. I’m going to go prehistoric on your ass, before there was a definition of this. If you were living 10,000 years ago and wanted to trade a chicken for a knife, it was a contract between two people exchanging something they felt had value for something else they felt had value. A “trade” was performed where both parties felt like they did ok. I have extra chickens, and this guy makes knives as tools. He used his labor to create knives, and I used my investment in chickens to create something I can trade for of perceived equal value. More on that later.
Now, when you have a whole village doing their own things, barter becomes very cumbersome and weird. I have an extra chicken and need a knife. Bob has an extra knife but doesn’t eat chicken. Steve has an extra shirt and wants a knife. You then have potentially a three was trade.
Over time, the BEST forms of money then evolved to get your academic definition of today. But OLD SCHOOL money is when you can find shit laying around your house and sell it or barter it. It is possessing tangible liquid assets that can be moved. A MEDIUM OF EXCHANGE is then something all agreed upon, like gold, that can be used for interim value. It holds a specific value.
My definition of money in respect to financial energy includes very liquid assets, gold, silver, commodities, etc. Think if you have a rolex laying around. It is not “money” like you think, but if a depression hits and you need money, it is extremely liquid and it holds a value. The most EFFICIENT forms of money evolved to be gold. But if you look around your house for items of VALUE, you can see toys you may have bought your kid for $200 might be worth $5 at a yard sale and the rolex you have may have retained all of its value. I felt it important to put these in a big bag of things for this conversation. You’ll see why in a moment.
With financial energy that is flowing around – it can be STORED like a battery. Where the bitcoin people got wrong was the literally translation to try and convert PHYSICAL energy into FINANCIAL energy. That was a mistake, and I’ll also explain why in a second.
Here is how you can store financial energy…
So if you can store financial energy in money, business, or property, here’s where I then define business and property.
When you unlock or take financial energy out of your money and move it to business, you expect an ROI. Meaning, you have $1800 in gold and convert to currency (which is a massively depreciating thing due to inflation, so you are a fool to hold cash for long) and then move it to a business.
This is sort of what happens with your $1800. Which I call “jewels” of financial energy, a play on joules of electricity.
So that “money” that you had really wasn’t giving you yield. However, it was storing your wealth. You can see how currency over the last 100 years is devalued against gold.
This business process that you just stored your $1800 in financial jewels then gets you back $3600 in jewels. What do you do with the other $1800 in jewels as a profit?
Where to put it?
Well, the THIRD place to store financial energy like a battery is property. With property, it can be rather illiquid (like your house) which before 2020, could actually take more than a week to sell.
Or, you can buy some beach front property that you might want to develop on down the road. Or, who knows, maybe it goes up 100x in value in 10 years and you sell it?
The last part of this is what I want crypto people to pay attention to. Asset backed digital currencies (like Kinesis) are crypto tokens that store information that I am an owner of an ounce of gold or silver – on the blockchain. This is money, very similar to how this was money.
This blockchain ledger shows that I hold this gold.
Where the crypto people get it slightly wrong is they think their crypto is money or a store of value. It is beach front property. What most non-IT people do not understand is that it is simply your name written in an empty parking space. You expect that someday will want to buy your parking space. Why? Why would you buy that parking space? Because there’s only so many parking spaces in that lot? Steve just opened up another parking lot down the street with 200 spaces. Bob is opening one next week with 100 spaces. And, when you do research, you see there are 10,000 parking lots all over the country, with people just waiting to buy them. Except no one is parking cars there. It’s just land. And you are hoping someday that someone will buy it.
Now, before you get overly offended. Crypto IS a speculative asset, and technically, it’s just an address on a blockchain. It is beachfront property. It doesn’t mean that 20 years from now there won’t be an application for your parking space. There may be, there may not be.
Where most of you got it right was by nailing the speculation and going 10x. That is fabulous. But then others who bought at the top rode it down 90%. Those were not so great.
That parking lot you bought, or perhaps beachfront property CAN have speculative value. THAT is where you got it right.
Where you got it wrong is thinking it is a store of value or money. And this is where I’m about to save your ass.
Properties of stores of financial energy
I’d like to posit that there are four major aspects of storing financial energy:
- PRESERVATION of financial energy/Store of wealth/hedge against currency
There are three major time periods for HOW to store financial energy
- Risk on
- Risk off
These items are extremely important to understand.
While gold may have been an incredible store of wealth for thousands of years, it has no yield. As demonstrated in my presentation, gold has RELATIVE VALUE to everything else. So you could buy a certain amount of goods with gold. 50 years ago, you could have bought the same things, and 50 years from now you can buy the same things. This PRESERVED my spending power over 50 years.
While you may see the price in gold drop the last 15 months, this is clickbait, as gold did this in 1976 before ripping up 8x and 2008 before going up 3x. We are at the base of Krakatoa, and your overlords are looking at 15 months of data to declare gold is dead after 5,000 years. Let me show you another way.
Now, let’s look at each class and those properties
- Yield – no yield. PRESERVATION of spending power over millennia. Gold is best form of this as other forms may decay
- Low risk. At times it goes down in dollar units, other times it goes up. Over 50 years, it has gone up 56x to keep the pace with inflation.
- Speculation. Zero. Proven store of wealth. EXTREMELY liquid in every country on earth.
- Preservation. Almost perfect. Think about how two silver dimes from 1964 bought a gallon of gas, and two silver dimes today cashed in could buy a gallon of gas
- Yield – can be high, can be low – business process and type of industry dictates
- Risk – can be low risk or high risk. ROI depends on risk appropriate for investment
- Speculation – can be highly speculative with new biotech or low spec with 50 year old mining company
- Preservation – can be extremely good in inflationary times and beat inflation by multiples. However, in recessions and depressions 100% loss of financial energy possible.
- Yield – none.
- Risk – can be low to high. Lower risk might be a house you live in, higher may be a speculative piece of land.
- Speculation – higher. A house can be speculative due to location, schools, crime. Is a dump being built next to you? With crypto, speculation is extremely high.
- Preservation – housing is usually ok with this, with inflation – but there’s a cost every year of taxes and maintenance. Land speculation could go to near zero. Cryptos don’t preserve wealth, as they are too volatile – can go up 100% in a day, or down 90% in a week.
All of this is then usually dependent on risk on/risk off time periods. We may have a bull market for the stocks, where everyone is then liquidating money to then go to currency to buy stocks. GREAT! Maybe they then liquidate more money and put a down payment on a house, buy land, or put a small amount in crypto. GREAT!!
The neutral times a lot of people go to currency as they try and understand the climate as to where to put that financial energy. In times of high inflation, they can lose 10% spending power per year, so it has to go somewhere. You might see selling of stocks first, perhaps selling of gold in margin call – and DXY goes up. But that is temporary – do you buy the dip and go back in on the equities? Or, rather, is this a good time to lock up profits and put it into gold?
If you think about currency in the physical energy sense, it is the state between asset classes traversing copper wire. When electricity goes over distance, you lose power with heat. The resistance in the wire (ohms) and distance are great factors in this. To me, the transaction cost is like ohms and the inflation rate is like the distance of the copper wire. Looking at it a different way? Look at my cost to get currency into stocks – free for most, but $4.50 for TSX stocks. If I’m going to buy something with BTC, I have a transaction fee.
So with financial energy – we must consider currency as the medium BETWEEN different states – with costs of longevity (inflation rate against currency over time, not distance) and transaction fees (resistance) between states. Sell my house? Costs me like 12% in sales fees and bank stuff. All of this stuff is acts as ways to slow currency between states of financial energy.
Now we go back to the party….let’s look at the states of matter. Kind of like gas, solid, liquid – etc. The temperature of the RISK ON or OFF is like a thermometer for each asset class.
The problem is that party of the RISK ON may come with a hangover.
And when the selling starts, shit can hit the fan. The problem is, most people do not realize that near the end of a bull run, they are actually becoming bag holders. Insiders are selling into huge spikes in prices in stocks, real estate, and cryptos. People who made 500% are turning this into a lot of currency.
Currency to me is the purgatory of financial energy and it needs to find a home. Those insiders who were selling some of their stocks at 500% gain? Buying gold to preserve that. Perhaps taking those winnings and buying a house.
But the odd man out of all of this is the speculators who bought at the top. The value stocks are mostly ok. Maybe they get dinged a little. But when you are buying Tesla at $1,000 when P/E ratios are off the charts and nowhere near planet earth, you get crushed. Buying Doge coin at $.81 will crush your soul. Buying Doge coin at $.03 and when it gets to $.80, selling half? SMART speculation. Buying Doge at $.81 expecting it to go to $20 a coin? Highly risky.
My point here is that those holding high value speculations with hundreds of percent gain going into a recession will get punisyhed because it is NOT a store of preservation of wealth. It is property that is a speculative asset. I have zero problem with people chasing speculations, but taking profits off the table and storing that into something that can preserve that wealth is the smart move.
Most people that invest in cryptos have never heard of betamax. And if you do not know what this is, this was before VHS and lost the format battle. Just because a bitcoin was first, doesn’t mean there’s not a bitcoin cash or some other “network” that comes about that isn’t better.
But for now, you have to understand that IF we are heading towards a recession, then those who have hundred of percent profit on speculation over the last few years right now are taking profits off of the table, hoping to sell you more telling you bitcoin is going to $100,000 and then $250,000 and then $1 million? Why would it if there is a mass liquidation event and those who are elite investors are moving their wealth towards the most proven store of wealth over 5,000 years?
I am saying that the speculation bet you have, IF you have profits, you might want to lock them in. MY money is on asset backed digital currency. Not bitcoin. IF you make millions, GREAT! Happy for you. But to think this is a store of wealth or money is pretty much how you lose your ass on a speculation.
With my gold explorers, I might have a 5-10x upside and a 50% downside. I have a lot of successes. Wish I could say I picked them. I hired people smarter than me to evaluate them. When I would get 2x or 3x plays, I’d take half or 1/3 off the table. In a GOLD run up, perhaps I put those winnings back into other miners (this is all the business class). However, I took profits out to pay for repairs on my rentals a few months back. Rentals are part of the business class – and these are yield bearing. Different risk profile than equities, so this can keep yield going if stock market goes down. I took some profits awhile back and bought junk silver and locked in my preservation. IF we have the stock market equities turning over, but gold catching a bid with rich people wanting to lock in preservation of wealth, my miners will take off. So in this situation, I might use currency to put that into businesses who mine gold and silver.
Where I’d say crypto is a speculative RISK ON play, as profits are locked in, and these markets start to decline, it becomes a RISK OFF scenario. In inflationary times, gold catches this bid to be a time capsule to preserve that wealth until the storm passes. Then, when RISK ON happens again, people unlock the financial energy and spending power in gold to currency to buy stocks and speculate again. IF you hold speculative items during a recession, you RISK complete loss of profits during this time.
Physical to financial energy
What bitcoin does is….rather pointless. I’ll explain this thought out more here, so before you go throwing shade, please hear me out.
When you see bitcoin, this is what it looks like.
Many want to call it digital gold. But this picture is a marketing scheme.
This is bitcoin:
They want to compare bitcoin to gold in how it is mined, and how it is a finite resource. And how it is harder to mine over time and the costs will go up. I get that. But there’s a massive difference….
When you mine gold, you are mining something that has a demand as money, investment, and jewelry. The REASON you mine it is your business is in business to MAKE MONEY. If the price of the product drops, you will not mine it for a loss. The same concept CAN be said for bitcoin in that if price of bitcoin goes down, perhaps less is mined?
With gold, you have these PEAs and feasibility studies to make a mine. Could be a 10-20 year process. Capital intensive. With bitcoin, someone is putting a lot of money up for mining rigs. They just cannot sit idle for years as bitcoin price is too low. With IT, processors advance twice as much in 18 months with Moore’s law. So if bitcoin price goes down for 2-3 years during a recession, the thinking is mining might stop? Consider the equipment you buy might be obsolete in 4 years to your competitors. They can buy 4 times the processing power and use 1/2 the energy as you, and they can mine and you can’t.
Meaning, this whole bitcoin mining concept is great when bitcoin is on a moon shot. But what happens in a recession? Gold was in the dumps for 20 years from 1980 to 2000. What would happen if bitcoin had 5 years where the price to mine a bitcoin cost more than the bitcoin? Ouch. Miners out of business.
What happens when all of the bitcoin miners stop? Well, not likely at the moment. How much does it cost to mine bitcoin?
If you look up the cost of the machine in the top row, you see that these are about $10k used. That means you are buying 1,482 of these at the cost of $14,820,000.
The average cost of electricity by me is $.13 per kWh. This article from CNET gives some insight to that each rig could be running at 1,000 watts. And, each bitcoin could take 1,544 kWh to make. That’s more than my house in 1.5 months.
You see above that if you are a miner this one machine makes .000634 BTC in a day. If you take that by 1,482, it gets you .939 BTC in a day.
Let’s run these numbers for a year.
365 days x .939 = 342.94 BTC in a year.
At today’s prices, you are looking at $62,507 = $21,436,250 in sales.
Energy costs were 1,544 kWh x .13 = $68,834.92
Using TODAY’s numbers, you can see the cost of that mining rig makes the money back in about 2/3 of a year! Wow!!
Now, let’s see what happens on a 90% price drop.
Sales in a year would be $6,250 x 342.94 = $2,143,625 in sales. That’s about a 7 year pay back for machinery that probably have a 2-3 year life.
My point of the numbers here are this – to make that 343 BTC, your energy costs at today’s BTC price are a fraction of your costs. The main cost here is $14m in equipment. It’s a good day when BTC is $62,000. But at what price point do things start hurting? How about the next halving? How about when BTC is at $10,000?
The average cost to mine BTC right now I saw was about $11,000. Could that mean it’s $22,000 in 2023/2024?
Since we have seen BTC go down 90% 3 times already, what happens when it goes under the cost of mining it for years on end? Who is going to invest in $15m of mining rigs for no profit?
You need a constant pump or the whole network collapses.
With gold, the demand is there to then have the ROI there to mine more. Where is BTC demand for utility? With gold, you take it and turn it into money and jewelry. IF that demand falls apart, you stop mining. But that gold is there you can use for eternity. BTC needs a network to run on. If no one is mining, and BTC is $6,000 – how is the distributed network running? Well, you are assuming nodes are getting paid in BTC somehow, but BTC takes forever for a transaction to clear and costs so much, who is using BTC as money to buy a cup of coffee? They aren’t. There are things like hashgraph that do this much better and efficiently.
Face it. If BTC doesn’t moonshot, no one has interest. No one puts $60,000 into BTC high risk investment for a 1% return.
You NEED the pump.
You NEED the hype.
Without it, the decentralized network falls apart.
As the speculators who made 5-10x take profits, you will see BTC start its 90% decline again. Bag holders may then bail to cut losses at 10-20%. When the price gets below $20,000 there’s no new mining rigs coming online.
The BIG picture is the “proof of work” concept. It has to solve a really hard math problem using all of those processors. In order to make a single bitcoin, it’s 1544 kWh of energy to do so. To me, it’s a silly exercise. WHY are you doing it? Because the expected ROI. IF I can make this thing for about $11,000 and sell it for $60,000, that is a $50,000 profit. But IF that ROI thinking disappears, mining stops. The PoW concept is to show you this consumes physical energy to make the product so they just didn’t “blip” them into existence.
A better mousetrap – what if you just blipped these into existence now? Instead of having miners spending $15 million on rigs to make a bitcoin a day, why couldn’t these be time released? Who gets it? A random node participant. Imagine just having a machine up running as a node and you just got a $60,000 bitcoin! In a lottery type of system, the math works out the same for your deflationary coin, but you won’t have wasteful equations being solved to crush energy. Now in the PoW concept, a miner can get that coin as a reward for the 1544 kWh of energy used. But in the lottery system, you don’t have to do anything except participate.
IF there are 21 million coins ever made, and IF there are 3 million left? Maybe you release 100 a day for 30,000 days? Hell, I would try and sign on to be a node for that chance!! And, if someone like me got one worth all of that? I’d figure out a way how to use it or sell it. Now? I do not want to expend financial energy for something that, to me, has no value.
My point is that bitcoin’s idea with the deflationary concept? OK – but you are still running into the problem of value. Everyone keeps talking about a ledger. How many of you actually took accounting? I did. My mom was a CPA.
This is what bitcoin REALLY looks like, in concept.
So you see me up there owning coin number 8. I want to sell it to Shannon for $60,000 on a trade platform.
You get out your fancy transaction logs before you had software, and do your business…
There, I just wrote the transaction on the blockchain, and now I want to summarize who has what.
Now, it isn’t even as sexy as above. What is ACTUALLY recorded is like a deed to an address space within this platform. The concept is because these spaces are of finite number, and there will be billions trying to get their name on these spaces, it drives up demand. But when price point gets too high, and perceived value doesn’t meet expectations, things start to happen:
- Less buying of object
- Substitutes are found. If charmin toilet paper was $100 a package, wouldn’t you switch to generic for the same utility?
- Increased pressure to sell to continue to pump value
Now, I had a bit of an argument on Twitter yesterday with a guy who likes gold and bitcoin. My issue isn’t that he likes bitcoin, it’s that he doesn’t grasp that bitcoin is a speculative property asset and gold is money. The two are cousins, but not brothers.
He said something like “money doesn’t have to be physical”. This may be where he’s wrong. IF you have any thoughts on Mises Regression Theorem, it states essentially that a currency only has value as long as it can buy gold. Now, I have showed you the value of currency in grams of gold over 100 years. How much longer can you perhaps buy gold with dollars? Maybe awhile yet.
But bitcoin has the same problem as currency and speculative beach front property (BFP). See, gold could melt up in a hyper inflation as well, but my contention is gold is money and is the center of the financial universe. Meaning, everything is priced in gold and its relative value to gold. Has been and always will be. There is no “relative value” of BTC to gold. Yes, there are ratios you can see. But BTC is acting like NUGT and hyper inflating in NOMINAL CURRENCY terms. NOT in value relative to gold.
When you look at Mike Maloney’s wealth cycles, you can clearly see how over hundreds of years, gold has relative value to exchanges and property. I demonstrate how gold has relative value to other commodities like oil, that are consistent over long periods of time, irrespective of their nominal values in whatever currency.
Meaning, BTC’s only relative value is to the USD (floating currency). So I ask you, what happens when that currency collapses?
If and when a currency is pegged to gold again, I think there will be a significantly different print for BTC price in gold currency.
Meaning – MONEY is either something of intrinsic value OR something that has a peg to intrinsic value. Our USD is currency, and not money. BTC is a speculative asset that CAN be used as currency, but it is not efficient or cost effective to do so.
This is what Kinesis crypto looks like.
This means I can send title to a portion of gold I have in a vault to someone else across the world for a cost of .45% instantly. Remember how gold has relative value to other things? I can buy a barrel of oil, essentially, with 1.92g of gold, and not care about any national currency.
I believe Kinesis is in its early stages of what could be amazing. When the next gold frenzy hits, and it will, those who have learned a lot about how fraudulent government fiat has been and fled to crypto will migrate to an asset-backed digital currency. You get all of the benefits of a bitcoin, none of the stupid math equations and power loss, AND at any time, you can redeem your tokens for gold or silver (soon to be emeralds as well). Meaning, this is NOT speculative property. The digital token is a RECEIPT for GOLD. Remember this?
This is what kinesis is. It uses blockchains accounting and ledger capabilities and pegs it to real money.
THAT being said, I could see this being THE money of the internet. Why? It has no local currency concerns until you want to cash out. Where BTC has no relative value to anything, I know 1 oz of gold can buy a fine tailored man’s suit for hundreds of years and 1 oz of that could buy that only. Other items then adjust for relative values, to gold. GOLD is the universal money of the world, and always has been.
My thinking is that whenever a recession hits again (none for 12 years, all time record here), many will lose their shit – and those that were smart to lock in profits to gold will see the nominal price of gold rise in all currencies as everything else struggles to catch a bid.
No trees lost in making a KAU on Kinesis.
If you think crypto is a store of value, let’s test that in an upcoming recession. No? Rick Rule says the 30 year mean of all investments in gold is 1.5%, and currently we are at .5%. This isn’t really because everyone has ditched gold as much as it’s been a RISK ON 10 years and a much greater percentage of investments have gone into stocks and speculations of all forms. Rick mentioned all we really need is a MEAN REVERSION to gold of 1.5% and gold goes nuts.
And this is how it happens. As insiders sell off HUGE gains, with inflation at 10%, they aren’t holding cash or bonds. They are putting their financial energy into a time capsule to PRESERVE their wealth during a time where everything deflates. At the end of the deflation, they unlock their financial energy and mop up with buying all of the things they like at super discounts.
Unfortunately, most of the crypto people out there are led to believe their parking spot is a store of wealth. It is not. It is a speculation, and those who do not lock in profits with converting to gold or silver may have problems in the time to come.