Browsing Category

Investing

My 8 Requirements for the Perfect Crypto-Currency

My 8 Requirements for the Perfect Crypto-Currency

Although I don’t own any, I find crypto-currencies to be a really interesting concept.  The world desperately needs an alternative to the shortcomings of venal central bankers and their unstable fiat currencies.

Then a thought crossed my mind.  What would my personal requirements for the perfect crypto-currency be?  What would make a crypto-currency good enough to challenge and possibly displace traditional government-issued money?

According to the Antique Sage, the perfect crypto-currency must be:

 

1) SECURE

There must be every assurance that the blockchain cannot be corrupted or manipulated in order to steal, divert, destroy, double spend or counterfeit the crypto-currency.  This basic requirement for a successful digital currency has largely been solved, albeit not without a few growing pains along the way.

All the large cryptos, including Bitcoin (BTC), Ethereum (ETC) and Ripple (XRP), along with most of the smaller ones, are quite secure today.

 

2) NON-INFLATIONARY

The terminal growth rate of the crypto money supply must be under 1% per annum.  This is to avoid the situation that exists with fiat currencies today, where central banks are free to issue currency in unlimited quantities to their banking buddies and the politically-connected (as happened during the 2008 financial crisis).

This is another problem that the crypto-community has largely solved.  Bitcoin, for example, will famously cap-out with a total of 21 million tokens.  After 21 million Bitcoin have been mined (most likely sometime in the 22nd century), the terminal growth rate of the currency will drop to zero.  No more Bitcoin will ever be created after this point.

Most other crypto-currencies have followed their progenitor’s lead.  For instance, Litecoin (LTC) will top-out at 84 million coins, while Cardano (ADA) has a maximum potential supply of 45 billion.  However, a few have chosen to allow infinite (but controlled) monetary expansion, like Monero (XMR) and Ethereum.  I believe this option is completely acceptable, provided the terminal inflation rate remains below 1%.

 

3) PRIVATE

Transactions must be truly anonymous with no possibility of corporate big data or governments using the blockchain to infer holdings, transaction participants or buying patterns.  Absolute crypto-privacy is still a work in progress, but a few pioneering crypto-currencies have taken up the challenge.

Foremost among these is Monero, in which all transaction data is completely private.  A couple other crypto-currencies – Zcash (ZEC) and Dash (DASH) – share some privacy attributes, although not quite to the same extent as Monero.

 

4) INEXPENSIVE (TO TRANSACT)

It must cost less than 10 cents to process a transaction. This would allow micro-transactions of just a couple dollars to be viable – an absolute requirement for any crypto-currency that wants to become truly mainstream.  It would also help the crypto in question to displace credit card transactions, where the VISA/MasterCard duopoly often charges 2% to 4% in fees, plus additional fees if foreign currency exchange is involved.

Many different crypto-ecosystems have already achieved this precondition for a commercially-successful digital currency.  According to this March 2018 article by The Motley Fool, Tron (TRX), Ripple, EOS (EOS) and Bitcoin Cash (BCH) all had transaction fees of less than $0.01.

 

5) FAST (TO TRANSACT)

The perfect crypto-currency must be able to process substantially all transactions in 5 seconds or less.  This would allow it to be used with confidence for internet purchases or international commerce.  Right now Nano (NANO), Stellar (XLM) and Steem (STEEM) meet this stringent criteria, while Ripple gets close with a transaction time of around 10 seconds.

However, I do believe it is important to note that transaction speed (how long it takes to process a transaction) is a separate issue from scalability (the number of transactions a crypto-network can process at peak load).  It is absolutely possible for a crypto to be very fast when its network is lightly loaded, but slow to a snail’s pace when transaction volume picks up.  Of course, the perfect crypto-currency would complete every transaction very quickly, regardless of network loads.

 

6) SCALABLE

It must be able to process 50,000 to 100,000 transactions per second.  If any crypto-currency ever hopes to displace our antiquated 20th century payment system, it has to be capable of significantly beating VISA’s 24,000 transactions per second.

I predicate this on the idea that a mainstream digital currency would have very strong worldwide demand, with a user base of anywhere from hundreds of millions to billions of individuals.  Murphy’s Law dictates that at some point in the future, everyone will try to buy their morning coffee with their crypto at exactly the same time.  Therefore, being able to outperform VISA’s current network throughput is a necessity.

Although no crypto-currency clears this significant technical hurdle yet, Ripple gets an honorable mention with its capacity to process approximately 1500 transactions per second.  I suspect new technological refinements will propel us past this benchmark in the next decade or two.

 

7) ENERGY EFFICIENT

The blockchain (or equivalent technology) used to process transactions must use as little energy as possible.  While it was initially an afterthought in the crypto-space, energy efficiency has gained increasing attention with the revelation that Bitcoin mining alone uses a staggering 73 TWh of energy per annum – the same amount of electricity used by the entire country of Austria.  As if that wasn’t enough, the British newspaper The Guardian recently released an article that claims Bitcoin mining consumes more energy than the copper, gold and platinum mining industries combined!

It stands to reason that it is unwise to waste electricity if we don’t need to, particularly on such a grand scale.  Therefore, having our perfect crypto-currency’s blockchain be as energy efficient as possible is a reasonable requirement.  In addition, I think it is vital to save our computing energy for the next item on the list.

 

8) A STORE OF VALUE

Processing the blockchain should not only tally up transactions, but also create computationally-expensive intellectual property that is of broad use to mankind. This could take the form of medical simulations, geologic mapping, astrophysics calculations or climate modeling, to name just a few possibilities. In addition, immediately after its creation via the blockchain mining process, this intellectual property must enter the public domain where it can be freely leveraged by any corporation, individual or non-profit group who wishes to use it.

This requirement is by far the most technically challenging of the 8 that I have listed.  However, cracking it will endow the winning crypto with the Holy Grail for all digital currencies – intrinsic value.  This would remove the last great disadvantage inherent in crypto-currencies – their ephemeral, purely-digital nature – and allow them to compete head-on with more traditional stores of value such as precious metals.

If you are interesting in reading more about this tantalizing possibility, I touched on it in an article titled “Blockchain 3.0 and the Problem with Bitcoin“.

 

Conclusion

So far I believe that the crypto-community has definitively solved my first two requirements (security and a low inflation rate).  I think the next three (privacy, low transaction cost and quick transactions) are in the process of being solved.  Scalability and energy efficiency, in contrast, are proving to be difficult hurdles.  And the final requirement for my perfect crypto-currency – that it be a store of value – is still just a fevered dream.

Perhaps even more importantly, all of these desirable attributes must be rolled up into a single crypto-currency before it can truly be competitive with existing fiat currencies.  In my opinion, we have a ways to go yet in crypto-land.

 

Read more thought-provoking Antique Sage crypto-currency articles here.

-or-

Read in-depth Antique Sage investment guides here.

Information Asymmetry and Antique Investing

Information Asymmetry and Antique Investing
Photo Credit: Eric Golub

I recently looked up a stock quote for Tesla, the luxury electric car manufacturer that everyone either loves or hates.  I happen to hate it.  In any case, its stock was trading for around $300 a share, which really got me thinking.

When Tesla finally files for bankruptcy, I was curious as to how much wealth will be destroyed.  Now I use the term “wealth” very loosely here because the value of Tesla’s physical and intellectual property will not be extinguished in a bankruptcy, just transferred to different owners.  But the value of that property will be far lower than the current market value of all of Tesla’s outstanding securities.

In order to calculate this, I needed a number called enterprise value, or EV for short.  The enterprise value of a company is the sum of a firm’s stock, debt and preferred equity market cap minus its cash balance.  It is, more or less, the total net value that the market currently assigns to a company.

Tesla’s EV turned out to be a mind-blowing $59 billion.  I describe this number as mind-blowing because in the event of bankruptcy, Tesla’s tangible and intangible property will probably have a value of no more than $5 billion.  That number could be significantly lower, too, – perhaps just $1 or $2 billion – if we happen to be in a recession when the firm finally collapses.

All that “wealth” between Tesla’s current $59 billion EV and its theoretical $5 billion liquidation value is effectively imaginary, and will eventually disappear.

But as interesting as this might be, it isn’t the crux of my article.

You see, I looked up Tesla’s enterprise value by opening up my computer’s web browser and navigating to the EDGAR website.  EDGAR is the SEC’s electronic database of company filings.  It took me a grand total of 3 minutes to find the pertinent data from Tesla’s latest quarterly report.

This is actually quite remarkable if you stop to think about it.  Investors today have almost unlimited amounts of information at their fingertips.  Do you want to know the latest depreciation numbers for some obscure penny stock?  No problem.  It is available at zero cost, other than a couple minutes of your time.

Before electronic SEC filings became mandatory in 1998, important financial data was much harder to get.  In those days, if you wanted to know a specific tidbit of data, you actually had to visit the SEC and pull a paper filing from their archives.  In fact, back in the 1970s and 1980s some investment firms used to maintain satellite offices in Washington, D.C. just for the sake of being able to access corporate filings before anyone else.

The idea that some investors might know important facts about a security or investment that other investors don’t is called information asymmetry.  And it is almost universally considered a bad thing in both economics and investing.

In 1970, the economist George Akerlof wrote a famous paper about information asymmetry titled The Market for Lemons: Quality Uncertainty and the Market Mechanism.  This groundbreaking study examined a hypothetical used car market where only the sellers know if the vehicles they are offering are “bad” lemons or “good” peaches.

Because car buyers don’t know if any specific used car is good or bad, they will only be willing to bid lower, “lemon” prices.  As a result, higher quality, “peach” cars will be withdrawn from the market as they cannot command a fair price.  Bad used cars will drive good used cars out of the market.

But is information asymmetry really universally bad?  Today, all investors have access to just about every piece of information available about any conventional asset.  Nobody has a definitive information edge (unless you have your nation’s central banker on speed-dial).

However, instead of ushering in an investing golden age, the lack of modern information asymmetry has contributed to indiscriminate speculation and serial asset bubbles.  The reason for this is because mountains of quickly and easily available data give investors a false sense of security about their investment decisions.

Investors in high-flying stocks implicitly believe that the companies they hold must be worth their current market value.  After all, don’t all these firms file timely and accurate financial statements that are instantaneously available?  If any of these public filings revealed embarrassing or damaging information, wouldn’t the market instantly react to these revelations by immediately punishing the company’s stock price?

In a word, no.  Currently, investors are supremely confident that they are making all the right moves.  A lack of information asymmetry only emboldens them.  They do not stop to think that maybe somebody knows something they don’t.  The absence of information asymmetry breeds investor complacency.

Luckily, I believe there a simple solution to this problem – diversify into markets that still retain a degree of information asymmetry.  This will help ensure that you purchase assets at a reasonable price.

And right now no market has more information asymmetry than the antiques market.

Let me just give you an example.  The British Royal Mint has struck proof versions of their gold Britannia bullion coins from 1987 until the present.  These beautiful coins feature the shield and trident wielding goddess Britannia (the personification of Great Britain) on their reverse and the bust of Queen Elizabeth II on their obverse.

But there is a little-known fact about proof gold Britannias.  Even though they are modern coins struck by a first-class national mint, it is almost impossible to find their mintage numbers.  This example of information asymmetry is interesting because most modern bullion coins are struck in large numbers, rendering them less than ideal for collectors.

But British proof gold Britannias are a little known exception to this rule.  Although you can’t pin down the exact mintages, in most instances the series is incredibly rare.  Most proof gold Britannia coins have mintages of just a few thousand specimens.  Some have mintages that are even lower – in the hundreds!  This is a shocking level of scarcity in a world where commemorative coins are often struck by the millions.

And yet these masterpieces of modern coinage generally sell for no more money than generic gold bullion coins.  The market completely disregards their proof quality, great design and extreme rarity.  And I attribute this pricing anomaly solely to information asymmetry.  Gold proof Britannias are simply so rare that people don’t know they are rare!

Although I’ve used gold proof Britannias as an illustration, there are many other areas in the antiques market where information asymmetry – rightly or wrongly – suppresses the prices of items.  Savvy investors are aware of this phenomenon and take full advantage of it.  You should too.

 

Read more thought-provoking Antique Sage investing articles here.

-or-

Read in-depth Antique Sage investment guides here.

Do People Know the Value of Physical Assets?

Do People Know the Value of Physical Assets?

Do people understand the value of physical assets?  Or has the very idea of money become so twisted in the modern era that we have lost sight of fundamental value?

Everybody knows that gold, silver, gemstones and other precious materials are valuable – potentially very valuable.  But knowing this tidbit of information from an academic standpoint and truly understanding it in a practical sense are two very different things.

I recently stumbled across a fascinating social experiment video posted by YouTuber Mark Dice.  In the video Mark walks the streets of Encinitas, California (a northern suburb of San Diego), offering to give pedestrians either a free Snickers candy bar or a free 1/10 troy ounce American Gold Eagle coin.

I won’t leave you in suspense.  A depressingly large number of people choose the free candy bar, with a retail value of about $1, over the solid gold coin, with a bullion value of around $140 at the time.

Of course, there were a few canny individuals who scooped up their free gold coin.  Even though Mark skillfully edited out these encounters, you know they happened because he has more or less run out of gold coins by the end of the experiment.

But it is still amazing to note that Mark appears to have given away substantially more candy bars than gold coins!  And this is in spite of the fact that everyone from kindergartners to senior citizens “knows” that gold is valuable.

I recently had my own personal experience with an average person failing to recognize the monetary value of precious metals.

I went garage sale picking and was lucky enough to discover a set of Gorham sterling silver flatware that was attractively priced.  In fact, it was so attractively priced that it was selling for well below bullion value.

But the interesting part of this story is that the woman selling the sterling flatware had clearly labeled it as sterling silver.  She definitely knew that it was solid silver.  And when I showed interest in the set, she declared that she had “looked it up online” to verify it was actually sterling.

In the final analysis, the garage sale woman simply didn’t understand the value of physical assets – in this case, silver.

But these situations got me thinking.  It has been 50 years since the U.S. dollar was linked to either gold or silver.  U.S. silver certificates were last exchangeable for silver in June 1968.  Then President Richard Nixon irrevocably severed the connection between the dollar and gold in August 1971.

Anybody who was born after the mid 1960s has no personal experience with precious metals as money.  This means that about 2/3 of Americans have never lived in a world where gold and silver were considered money.  It is a similar story in other developed nations as well.

So is it any wonder that people have no idea of the value of physical assets?

I don’t believe that the systematic demonetization of gold and silver was a historical accident driven purely by exigent financial circumstances.  Instead, it is apparent that our financial authorities have gone to great lengths to dissociate the entire concept of money from physical commodities like precious metals.

Floating the U.S. dollar has created a consequence-free, spendthrift wonderland for politicians, allowing the Federal Government to run almost continuous deficits since the 1960s.  In addition, this policy has freed the Federal Reserve to pursue progressively easier monetary policies over the decades, culminating in massive interest-free loans for the too big to fail banks during the last financial crisis.

But perhaps the most deleterious side effect of pure fiat money is the distorted perception of value introduced via our serial bubble economy.

At the turn of the millennium, “new economy” tech stocks were assigned absurdly high valuations by the market.  Examples include online retailer Pets.com (now bankrupt) and internet incubator CMGI (now renamed Steel Connect, Inc. and trading for under $2 a share).

During this bubble, gold and silver traded at multi-decade, generational lows.  You could hardly give precious metals away.

After the original tech-bubble burst, the Fed quickly inflated a rebound housing bubble via its infinitely expandable money supply.  Frenzied speculators bid hundreds of thousands of dollars for bare-bones Miami condos and hastily constructed McMansions in the Las Vegas desert.

The housing bubble was even more destabilizing than its predecessor.  When it finally burst, the global economy nearly ground to a halt.  Gold and silver finally caught a bid, although they were still massively undervalued during this time.

But the Fed wasn’t done punishing average people yet.  Unwilling to admit its loose monetary policies were gradually hollowing out the U.S. economy, the Fed embarked on yet another ill-advised bubble-chasing episode.  This time, they flooded the financial markets with unnecessary, counter-productive liquidity via “Quantitative Easing” – another name for money printing.

This created the bubble we are currently living in, which is sometimes called “The Everything Bubble”.  At this point, our concept of money has become so divorced from reality that paying hundreds or thousands of dollars for largely imaginary crypto-currencies seems like a good idea.  Compared to that, buying a share of Amazon for $1,600 or Netflix for $350 appears downright sane, even if it isn’t.

Of course, as in every financial bubble before, physical assets like precious metals and gemstones have been left wallowing in obscurity.  Right now you can buy an ounce of platinum for the same price it was back in 2004 – fully 15 years ago.  Despite the fact that the price of silver has risen by a factor of 3 over the past 20 years, it is still trading near multi-century valuation lows.  The perennially overlooked gemstone spinel – a close cousin to rubies and sapphires – is available for shockingly inexpensive prices.

But most people have been steeped in our modern-day witch’s brew of fiat currencies, bubble economics and manufactured desirability (think Apple’s iPhone) for so long that they no longer understand the monetary value of truly rare physical assets.

I firmly believe that this dynamic will fully reverse one day.  But in the meantime, savvy investors can scoop up tremendously beautiful and desirable physical assets for laughably low prices.

 

Read more thought-provoking Antique Sage editorial articles here.

-or-

Read in-depth Antique Sage investment guides here.

The Best Tangible Assets to Stockpile for a Depression

The Best Tangible Assets to Stockpile for a Depression

Looking for the best tangible assets to stockpile or hoard in a case of a depression or financial crisis?  Then read on for the Antique Sage’s unique opinion!

 

Pre-1965 U.S. 90% Junk Silver Coins

Pre-1965 U.S. junk silver coinage is a staple of the prepping industry, and with good reason.  If you’re worried that a massive depression will crash the economy, then this is one of the best physical assets to own.

Until 1964, all circulating U.S. dimes, quarters and half dollars were minted from 90% silver and 10% copper.  Starting in 1965, the U.S. Mint switched over to a copper-nickel sandwich composition, which has little intrinsic value.  This is the same base-metal alloy that is still in use today for these coins.

Each $1 face value of circulated U.S. junk silver coins contain approximately 0.715 troy ounces of pure silver, which is worth around $11.50 with silver trading at just over $16 a troy ounce.  Because of their silver content, pre-1965 silver coins offer a hedge against not only inflation, but also economic hard times.

90% junk silver would be incredibly useful in a depression because it is widely recognized and accepted by the public.  It would be perfect for medium-sized transactions – anywhere from just a few dollars to several hundred dollars – in any situation where physical cash is either unavailable or unacceptable.  And because these old coins are solid silver, no person in their right mind would refuse them.

As an added bonus, it is easy to buy and stockpile 90% junk silver in any quantity you desire, from just a few coins, to $5 or $10 face value rolls, to massive $500 or $1,000 face value bags.

 

Bottles of Hard Liquor

Liquor is one of the more overlooked physical assets that would prove quite useful in hard times.  If you really believe that a severe economic depression is coming, then stockpiling a case or two of your favorite hard liquor might be a good choice.

An unopened bottle of hard liquor will keep for several decades if stored in a cool, dark place.  This applies to pretty much any distilled liquor with a high alcohol content, including whiskey, vodka, rum, bourbon, gin, tequila, and brandy, to name just a few.  Of course, all bets are off if you open a bottle, so no sampling the goods unless you intend to finish the entire thing!

Stashing liquid physical assets of this nature would confer three major benefits.

First, if the economy ever implodes, good quality hard liquor would be in high demand, making it easy to trade for other necessities.  If you need a neighbor, friend or acquaintance to do a favor for you, nothing would grease the gears of commerce quite like a bottle of fine scotch.

Second, any suitably high-proof liquor could be used as a convenient disinfectant in a pinch, which may be important if medical supplies are ever hard to find.  I know this seems insanely improbable right now, but just ask any Venezuelan about the unpleasant things that can happen during a severe economic dislocation.

And finally, regardless of whether the apocalypse arrives on schedule or not, you can always sit down with a bottle from your secret stash and enjoy a stiff glass or two!

 

Pre-1982 U.S. Copper Pennies

Pre-1982 copper pennies might seem like an odd physical asset to squirrel away, but in the context of a severe depression, they make a lot of sense.  Due to their copper content, they have a definitive, easily calculated intrinsic value.  Furthermore, they are not only instantly recognizable, but also readily available (at least for people in the United States).

Most people don’t realize that pennies in the United States are no longer made from copper.  In fact, they haven’t been made from copper since 1982.  That was the year that the composition of the lowly cent was switched over from a traditional 95% copper/5% zinc alloy to a debased, copper-plated zinc core.

It takes about 154 circulated pre-1982 pennies to equal one pound, but copper currently trades for around $2.80 a pound on the commodities market.  This means that each roll of copper pennies (with a face value of $0.50) has a bullion value of close to $1!

Old copper pennies would be perfect for micro-transactions in a financially chaotic world.  It would be superbly easy to slip someone a roll or two of copper pennies in payment for a much-needed good or service.

But best of all, pre-1982 copper pennies can still be found in circulation.  So if you are enterprising and have the time, you can sort through your spare change and pick them out.  Keep this up for 6 months or a year and you will have yourself a considerable penny hoard – one that will be worth more than its face value!  Of course, if you don’t have the time to sort through loose change, you can always buy pre-sorted pennies from an e-commerce platform like eBay.

If you want to learn more about pre-1982 copper pennies, I suggest you read my recent article titled “5 Odd Investments for the Stock Market Skeptic under $100“.

 

Physical Cash

In a depression, cash is king.  Out of all the physical assets you could possibly stockpile in preparation for a systematic financial emergency, cash is probably the best.

Just think.  A well-placed $20, $50 or $100 bill can emphasize the seriousness of your intention far better than any credit or debit card.

Cash, of course, is accepted everywhere in practically all situations.  Furthermore, physical currency can provide you with rare opportunities that no other form of payment can.

For example, I recently went to a garage sale where I purchased a set of sterling silver flatware worth $300 for just $110 in cash.  But if I hadn’t shown up with a stack of $20 bills in my wallet, I never could have closed the deal.

In addition, in a truly widespread economic collapse, normal payment methods might not even be operational.  Credit and debit cards are reliant on monolithic payment networks run by Visa, MasterCard, American Express and Discover.  If these ever go dark for whatever reason (even temporarily), your credit card is an insignificant, useless wafer of plastic.  Oh, and in this scenario, you can forget trying to buy anything online because there would be no way to pay for it!

Euphemistically-named “bank holidays” are another pitfall to consider in the context of a financial crisis.  During a bank holiday, the banking system closes while the government tries to sort through the financial wreckage.  But during this time, depositors do not have access to ACH and wire transfers, and only have very limited access to ATMs.

Basically, if you don’t already have a sizable stash of physical cash on hand before a bank holiday happens, you are out of luck.  So start stacking those C-notes today, while you still can!

 

Read more thought-provoking Antique Sage investing articles here.

-or-

Read in-depth Antique Sage investment guides here.