Episode 83: Is Bitcoin Replacing Gold?

Description:

The WealthAbility Show Podcast Episode #83 – Will the value of bitcoin continue to rise or will it come crashing down? Nik Bhatia joins Tom to discuss why many investors are attracted to the idea that crypto currency is “The People’s Money.”

Looking for more on Nik Bhatia?

Website: https://timevalueofbtc.medium.com/

Twitter: https://twitter.com/timevalueofbtc

LinkedIn: https://www.linkedin.com/in/nik-bhati…

Facebook: https://www.facebook.com/timharford1

Twitter: https://twitter.com/timharford

SHOW NOTES:

06:24 – Will Governments Shut Down Bitcoin?

09:40 – Could A New Crypto Currency Takeout Bitcoin?

12:54 – How Does Bitcoin Fit Into Layered Money?

15:03 – Will Bitcoin See Transactional Taxes?

17:09 – Does The U.S. Government Want To Compete With Bitcoin?

20:31 – What Is The Purpose Of Bitcoin?

22:04 – Can Bitcoin’s Price Be Manipulated Like Gold?y?

Transcript
Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility® Show, where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility. So, Bitcoin is all over the news right now. And the question is, is Bitcoin going to take over the world, or frankly, is it going to go to zero? My theory is it goes either to $2 million per coin, or it goes to zero per coin. And taxation has a lot to do with this.

So today we're going to discuss how it gets regulated, what the chances are of it sticking around, are there other currencies? Because I think it's like my friend, Robert Kiyosaki says, he goes, “We have gold, which is God's money. We have paper, which is the government's money. And we have Bitcoin, which is the people's money.” I think that's a really concise way to put it. And the question is, will it continue to be the people's money? Should we be paying much closer attention to this as investors and just people who want to maintain a store of value, if nothing else, to prevent this massive inflation like we have right now, the price inflation.

And we have with us an expert in this area, Nik Bhatia. And Nik, he has an enviable position of being an adjunct professor. And I love this because I was an adjunct professor for 14 years in the Graduate School of Business at ASU. And he's at USC. And adjunct professors are the only people at the school who make less than the custodian. So we do it out of love. We do it because we love to teach. Nik, welcome to the show. And tell us a little bit about you and how you got into Bitcoin from where you were trading treasuries.

Nik Bhatia:

Thank you, Tom. It's really great to be here. I appreciate it. So my background is in the asset management industry. I went to school to study finance, and fixed income in particular. I started in the fixed income industry at a hedge fund, and I moved on to the trading desk at a large institutional fixed income manager here in Los Angeles. And I was trading money markets to begin with, treasury bills. Then I started to trade the whole US treasury curve, as well as US treasury futures and other interest rate derivatives. So as a US treasuries trader and strategist, my job is to analyze what's going on across the world, in every single market to determine if the expectations for growth and inflation are higher or lower and ending up in higher or lower interest rates. So, that's my background.

And as I was trading treasuries, I started to discover Bitcoin. I saw a previous parabolic ascent in the price. And once it broke that $1,000 barrier, I saw, potentially, another one of those parabolic moves up and I want it to be involved. And so, at that point, I said, I need to be long Bitcoin, but I don't understand anything about it. So I bought a computer science textbook called Mastering Bitcoin. People in Bitcoin will be familiar with it, by Andreas Antonopoulos. And it was that, it is a computer science textbook. And so, it was completely out of my realm of expertise. But what I saw is this incredibly powerful new computer code called Bitcoin based off of four decades of computer science, cryptography going back to NSA innovations and secure hash algorithms, all these things that I didn't know about, this whole cryptography science. And I saw that Bitcoin was this unique, truly unique innovation and one of a kind.

And it was around the time when all these other cryptocurrencies were coming onto the scene. And I quickly was able to identify Bitcoin as the gold equivalent of the digital landscape, where it was the truly neutral form of value storage. There was no central party. There was no person that could be identified. It was like Robert says, the people's currency. And every subsequent cryptocurrency, at least, has a central point of a company or a person or a developing team that they can identify that can make sweeping changes. Bitcoin is the only thing that can't have that happen to it. So while a million cryptocurrencies can be invented after Bitcoin, there is only one native currency of the internet, and that's Bitcoin. And so-

Tom Wheelwright:

Interesting.

Nik Bhatia:

After a few years, I transitioned into a Bitcoin-centric mindset and I left my job on the desk to write a book about Bitcoin called Layered Money.

Tom Wheelwright:

Awesome. Well, thank you. And everybody, it's Layered Money and you can find Nik at layeredmoney.com. So, all right, Nik. So, here's my theory. My theory is that Bitcoin either goes to 2 million or zero. Because one of the issues right now, of course, is while it is a store of value, it's not used. I mean, it's not like there's a huge trading platform for using Bitcoin for actual currency transactions. So when people need to use Bitcoin as a currency, they take it out of Bitcoin and turn it into the US dollar, the Euro, the Yuan, some other currency in order to spend the money. And my question is, it seems like the government, okay, who like to control everything, might be a little concerned about Bitcoin that they can't control other than through taxation. So how do you address that Nik, when you say you think Bitcoin is here to last? Why do you think the governments won't shut it down?

Nik Bhatia:

It's a great point. And really, what we've seen over the past couple of years, in the United States specifically, because that's where I live… It's still the most powerful economy in the world. And it's still the most influential regulatory landscape and taxation framework in the world. Right? And so, that's what I'm focused on. The United States government has had a massive sweeping embrace of Bitcoin as a technology over the last 12 to 24 months. And it's a signal to me that the government is here to embrace Bitcoin as a technology platform and as a form of free speech, really, in terms of cryptography, in the way that they have set forth certain regulations.

So, the number one thing that they have done is through the Treasury Department, The Office of the Comptroller of the Currency, just in January, announced that Bitcoin and other cryptocurrency-like platforms, they call them INVNs, it stands for independent node verification networks, so anything that functions with a node network like Bitcoin does, and there are other things that do that as well, those can now be used legally by banks to transfer value between them as long as banking laws are followed. So as the new rails for a financial system, and it's not just Bitcoin, mind you, it's other types of stable coins which are cryptocurrencies that peg to a dollar because of some reserve status it has with the issuing counter party, all of those types of platforms can now be used by banks legally. And that's the first thing that the Treasury Department has said-

Tom Wheelwright:

So you're basically saying, Nik, that the Treasury Department has legitimized Bitcoin and specifically uses the term “Bitcoin,” which obviously is good for Bitcoin. Right? Because it says, “Well, this is the currency that we're concerned about. And then there's a bunch of others.”

Let's back up just a minute so that everybody understands what Bitcoin is because you say, well, this is the one and it's different from these others like Ethereum, et cetera, et cetera, et cetera. And one of the differences, of course, is that Bitcoin, A, it was kind of invented independently. And second of all, we know that there's only a fixed amount of Bitcoin. Right? I mean, it stops, I think, at what? 24 million.

Nik Bhatia:

21 million.

Tom Wheelwright:

21 million Bitcoin. And so, it is a closed loop. And it's basically blockchain technology, right? But it's blockchain technology where you can't increase the number, the supply. So, even gold can be mined forever, and ever, and ever. I mean, presumably, somewhere there's a limit in the earth, but we haven't found it yet. And Bitcoin is mined, obviously. But eventually we get to that 21 million. And once we get to that 20 million, we're done. My question is why couldn't there be another cryptocurrency since it's just a token. Right? It's like Fiat currency in that it's a token, it's not something that is tangible like gold. Why couldn't some other currency come along and do the exact same thing?

Nik Bhatia:

So, there are two answers here. Number one is looking at the past to give us an indication of what to expect. We've had now thousands of attempts of cryptocurrencies that have all, maybe had brief price rises in Bitcoin terms. So forget dollar terms, because that's not relevant when talking about one cryptocurrency verses the next. But they've had short run-ups in price versus Bitcoin and ultimate failure. And so, it's happened now 100% of the time on the long-time horizon, including Ethereum, which is down over 50% from its highs in Bitcoin terms. So that's one answer is that we have to look at, empirically, the attempts in the past and see that 100% of them have failed in terms of actually trying to get a long-term network effect away from Bitcoin as the principal store of value in the digital world.

The second is this idea of mining and the proof of work that goes behind securing the Bitcoin network and what in fact does make it incorruptible, decentralized, and absent of any central party that you can influence to change the supply, to manipulate the Bitcoin supply and the algorithm on its way to 21 million. And that proof of work, the mining energy… This brings up another criticism of Bitcoin, which is that it's going to boil the oceans. It's actually far from that. The energy that goes into mining Bitcoin is, for the most part, renewable, and even capturing excess emissions, these are called fugitive emissions, to mine this currency. [inaudible 00:11:28] wave of energy is so large and is so much greater than every other cryptocurrency combined that if we assume that mining and the energy is part of the value of Bitcoin and what makes it so special then no other cryptocurrency is even in the same realm in terms of that energy.

So you can talk about other cryptocurrencies that are quicker to use, but it misses the point that Bitcoin has value because it emulates gold. Yes, there's a difference in the way that supply becomes mined in Bitcoin, and the way it becomes mined in gold to the earth. But it does mimic gold. And it is proving with its price, both in dollars and in other cryptocurrency terms, than it is the dominant value storage mechanism and that it can be used in a layered framework. And that's what my book is about, so you do transactions, not on the Bitcoin network necessarily.

Tom Wheelwright:

Right. Right. That's what I've been learning. I've been studying this a lot, Nik, recently. And what I've been learning recently is that it makes sense that there might be, when you say layered… And maybe you can explain that a little bit. But the way I look at that is, look, if I had a credit card that was tied to Bitcoin, then I've got easy transactions with the credit card. As long as the companies take the credit, right, it's okay that it's satisfied through Bitcoin. Is that a reasonable analogy?

Nik Bhatia:

Absolutely. And that does exist today. There are cryptocurrency exchanges, I won't name any of them, that have specific products that are credit cards that are tied to their Bitcoin balances, were it does an automatic transaction every time you do the transaction to get the spot rate. There are also other forms of technology that allow cross currency exchange using the Bitcoin network as a base. But the users actually never see it when you're converting from dollar to Euro. So Bitcoin is operating behind the scene as well. And that is something that goes along with what the Treasury Department has allowed.

Tom Wheelwright:

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So, one thing I know for sure is that you have to report your transactions on your tax return. And not only that, there's a box you check on your tax return now in the US that says that you'd had a cryptocurrency transaction. Okay. Either buy, or sell, or use. So the IRS is clearly tracking that. And by the way, if you mark that box and you lie about it, that is a felony. That's not a civil penalty. Okay? You don't just pay dollars for that, you go to prison for that. So they are very seriously concerned about this. They're talking about a transaction tax on the stock market, what would prevent a similar transaction tax on Bitcoin?

Nik Bhatia:

Jurisdictional arbitrage, that's the bottom line. If you start taxing Bitcoin transactions in an unfair way relative to the rest of the world, the businesses will leave. So we have, Coinbase is about to file for their IPO. We have The Bank of New York Mellon and Fidelity Investments, two of the most prestigious and long running institutions in the world, financial history, that have live custody products for Bitcoin. And so, the government isn't, in my opinion, going to come down and put an excess tax on Bitcoin, whether it's the capital gains perspective or from a transaction perspective where you're putting an onerous tax on the public. The government will take their share. They will tax Bitcoin at the capital gains rate. They will even try to prevent Bitcoin from being used as a currency within the economy by making every Bitcoin transaction a taxable-

Tom Wheelwright:

Well, let's stop just there for a second, Nik. That is currently the law. Okay. And that's not going to change. Okay. Because of the fluctuation in value, frankly, it's not a whole lot different than buying and selling euros. I mean, it's basically the same. It's a currency type transaction. And if you did your transactions in the US and euros, you have to report the same fluctuation in price. Right? So it's a gain or a loss. And just also to be clear for our listeners, when Nik talks about capital gain, that's not always a lower tax rate. Okay. So a short-term capital gain under a year is taxed at ordinary income rates. It's only when you hold up more than a year… And could they make you hold it three years like they do for certain transactions in the stock market? Yeah, I think they could do that. the question I have, so Janet Yellen recently started talking about a US digital currency. Why would the US want to compete with Bitcoin?

Nik Bhatia:

They don't want to compete with Bitcoin. Definitely not. And I talk about this in chapter nine of my book, Layered Money where central bank digital currencies address a few things. They, number one, address the inability for the central bank to issue a stimulus to a retail setting. They can only provide monetary stimulus to the banking system and hope that the banking system eases credit standards for lending and getting that money into the economy. But they can't give money to people, only the US Treasury and the government and Congress can do that, they could issue fiscal stimulus. So a central bank digital currency bridges that gap. It allows this idea of the digital helicopter, where we have helicopter money as a theory. But it can't be done because you can't actually drop dollar bills out of helicopters so that people can use them. But you can issue a central bank digital currency.

So I believe that CBDCs are a form of the digital helicopter, and it is a policy goal, and motivation for the central bank to be able to do that. They don't have to pass it through Congress. But again, that's a long-term future that I see over the next five years here in the United States for digital currency. And definitely, they don't want to compete with Bitcoin. Bitcoin is an asset that's independent of the financial system. It's not involved in banking, it's not involved in credit issuance, which the US economy completely depends upon. And so, their goal is to have a digital currency so that it modernizes the technology that we have, where you have reserve ratios that really aren't verifiable by anybody outside of the banking system. Central bank digital currencies, and bank issued stable coins or bank issued tokens that have some sort of relative transparency. It doesn't mean that people can affect transactions, but we might be able to have a new transparency. And that's what blockchain technology is all about, it's an increase in transparency.

Tom Wheelwright:

Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine, he's a client of mine. He's a former board-certified surgeon and he's turned into a real estate professional. So he has this podcast that is geared towards high-paid professionals. That's who he's geared towards. So if you're a high-paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financial educated. I'd like to take control of my money and my life and my taxes.” I would love to recommend Buck Joffrey's podcast which is called Wealth Formula Podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

The way I like to put blockchain technology, it's basically triple-entry accounting. Right?

Nik Bhatia:

That's right.

Tom Wheelwright:

Because basically, double-entry accounting is what makes our economy function, our worldwide economy function. It wouldn't function without double-entry accounting. And triple-entry accounting basically ensures accuracy of those transactions. So, blockchain technology makes all the sense in the world in being, A, a distributive network, but more importantly, an self-auditing type network.

Nik Bhatia:

And can I just say, Tom, that the question goes back to what is Bitcoin for? Bitcoin is for a neutral currency in a digital age. For people that aren't necessarily United States or Western European citizens, they want an independent currency that's not tied to a government. United States citizens might want that too, but it's not the only way to look at it. People in Africa, Latin America have currency regimes that are in tremendous disarray.

Tom Wheelwright:

Oh yeah-

Nik Bhatia:

And they need something in this modern age. And they can't rely on a thousand different cryptocurrency projects. They can rely on Bitcoin. And we are in the beginning stages of that. Bitcoin, I think it's won, but it's going to take years to prove to the rest of the world that it has won this race. But we are at the beginning and the price is the truth. Look at what's happening, again, we're seeing an exponential rise in Bitcoin for the fourth time.

Tom Wheelwright:

So, let me ask you a question. So let's talk about that fluctuation because it's massive fluctuation. I mean, gold doesn't fluctuate nearly as much percentage-wise or silver, nearly. And by the way, gold and silver are hugely manipulated in the market. We know, because otherwise, they'd be much higher. Two questions. One is, what's to prevent Bitcoin from being manipulated the way gold and silver are manipulated through shorts, et cetera, et cetera? And second of all, from a practical standpoint, what do you do about that fluctuation?

Nik Bhatia:

Yeah. So the first question, there is no way to mimic Bitcoin in the physical realm. And so paper shorts of gold and silver easily translate to manipulate the price down of those metals. But in Bitcoin, it's not the case yet. So I can't say that it won't happen, but right now the truth is in the physical exchange. And so, the prices on the exchanges that make sure delivery is happening makes it so that that's the dominant market. If the paper market has just started, and it might take a lot of money on that side to make [crosstalk 00:22:43].

Tom Wheelwright:

So will we get a Bitcoin ETF?

Nik Bhatia:

Oh, 100%. I can't tell you when, but it's definitely coming. This is what I'm talking about, Tom, with the way that the government is embracing it. Canada has a line ETF now. The AUM is skyrocketing in the first few weeks. It's just an inevitability that we'll get one here.

Tom Wheelwright:

Got it.

Nik Bhatia:

And let's go to your second question, the volatility. This is the only criticism of Bitcoin that people that are in the investing public, your audience, need to latch on to. The volatility of Bitcoin is so extreme that if you don't have a minimum three to five-year holding period expectation, you are putting yourself at a massive risk. And so, Bitcoin is not for everybody. It is not something that is just like, “Oh, the internet is going to take over. Amazon.com will be delivering everything in less than four hours to your house.” We can't just make that leap and prediction and say buy it now and become a billionaire tomorrow. The ups and downs on the wave are going to be so violent that it actually precludes a lot of investors from taking participation in that.

Tom Wheelwright:

So, from a practical standpoint… And we'll wrap up. This has been a terrific discussion. But from a practical standpoint, then, it would seem like there's obvious actions you can take. One is to buy it. But a second action you would want to take, I would presume, is don't put all your money into this. Right? This is something that is maybe a small portion of your finances. Something that you are completely willing to risk 100%, because technically, it literally could go to zero. Literally it could go to zero, just like the dollar could technically go to zero. So you put all your money into that and it's not backed by any government… What are some other ideas, practical things that people ought to be considering when it comes to Bitcoin and or other digital currencies?

Nik Bhatia:

I think your audience would be familiar with this, but study behavioral finance. Study the book, Thinking Fast and Slow. Study how greed and fear play off each other. If you want to participate in Bitcoin, you have to, first of all, you have to have a long-time horizon. You cannot trade it unless you are a professional. And I do mean professional, meaning you have a trading system. And by system, I mean, not just your gut, but an actual system of how you buy and sell like a professional trader does. So, don't trade it if you're not a trader. Buy and hold if you want to participate. Don't put all your eggs in one basket, meaning don't put all your money in Bitcoin. I don't see any reason to invest in other cryptocurrencies, unless you are making that effort to research each one and come up with it. I'm a global macro person. I study the global economy. Bitcoin has a role in that, so therefore, I am long Bitcoin and I wrote a book about it. But I don't mention any other cryptocurrency because they'll projects that don't concern the globally macro economic scene.

Tom Wheelwright:

I think that's a really good point to make and then you can give us your last words, Nik, is that Bitcoin is purely a currency. Right? It is pure and it doesn't have other uses. They call it a token. And it's a token just like a dollar bill is a token. Right? Dollar bill being a token of the US taxpayer, whereas Bitcoin, a token that was invented. And the difference is that, at least the other cryptocurrencies I'm familiar with, Ethereum would be a good example of that, have uses outside of being a token. And for that reason, they function more like a stock than they do like a currency is the way I look at it because it's actually a business as opposed to a pure currency. Am I on the right track here, Nik?

Nik Bhatia:

I think that's a very fair assessment. And it's an analogy that I like is cryptocurrencies that aren't Bitcoin are more like stocks, their projects, they're companies, they have goals. They're not money, though.

Tom Wheelwright:

Right.

Nik Bhatia:

And that's the key. Bitcoin is a currency, but it's also money. These other cryptocurrencies can function as currencies, but that doesn't mean that they are money.

Tom Wheelwright:

Awesome. So, Nik Bhatia, Layered Money, layeredmoney.com. Layered Money is the book, layeredmoney.com. Thank you, Nik Bhatia. Just remember, when we get this financial knowledge, understand that this is affecting our money, so we're going to make more money. But it also affects our taxes. And don't forget, the Bitcoin is taxable transaction, and you have to report all that. When we get this type of information, which is what The WealthAbility Show is all about… And thank you, Nik Bhatia, layeredmoney.com. You're always going to make way more money and pay way less tax. I'll see you next time.

Announer:

You've been listening to The WealthAbility Show with Tom Wheelwright, way more money, way less taxes. To learn more, go to WealthAbility.com.