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Annuities Versus Mutual Funds: What’s Best For Retirement Planning?

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An annuity, a long-term contract between a buyer and an insurance company that allows the accumulation of funds on a tax-deferred basis for later payout in the form of a guaranteed income, can be part of a retirement plan, as discussed in last month’s article, “Do Annuities Have A Role In Retirement Planning?

However, it is important to weigh the advantages and disadvantages of owning an annuity against other investment options for retirement, such as mutual funds.

Before investing, one should compare the annuity fee structure with regular no-load mutual funds. No-load mutual funds levy no sales commission or surrender charge and impose average annual expenses of less than 0.5% for index funds or around 1.5% for actively managed funds.

It’s also important to consider that earnings from an annuity will be taxed as ordinary income when the earnings are withdrawn, no matter how long the policyholder has owned the account.

The scenarios discussed in this article apply in the United States. Readers are encouraged to consult their accountants about tax considerations related to buying annuities.

Annuities’ Advantages

Annuities do have some important advantages over other investments in retirement planning. Payouts can be guaranteed for life, regardless of how much the account actually earns, and they often include a guaranteed death benefit.

Income from stocks and mutual funds is not guaranteed, and there is no death benefit.

With mutual funds, the investor pays in an amount that is invested in a number of stocks, bonds, or a mixture of both, to create a stream of retirement income from stock dividends and bond interest.

While mutual funds use investment diversity to limit market risk, this is not a guarantee, according to Howard Kaye of Howard Kaye Insurance. Earnings can fluctuate significantly, and it is possible that no dividends or earnings will be paid out, especially if the principal is reduced.

Annuities have other advantages as well.

Unlike investments in tax-deferred retirement accounts, there is no limit on the amount that can be invested tax-deferred in an annuity, unless it is held inside a tax-deferred account, such as an IRA or a 401(k).

Variable annuities offer the opportunity to earn more than the guaranteed payment, depending on the performance of the investments. A variable annuity is essentially a mutual fund inside of a tax-deferred insurance policy, according to Trust Point, a Wisconsin based wealth management firm. Investments are made within mutual funds or mutual-fund-type accounts offered by the particular annuity, and the earnings grow tax deferred until they’re withdrawn.

Variable annuity investors can also switch from one investment to another within the annuity’s menu of choices without paying taxes. A mutual fund investor cannot switch among taxable mutual funds. Hence, annuity investors have more flexibility in adjusting their portfolios.

Annuities’ Disadvantages

Annuities are not without their disadvantages, however.

The earnings from an annuity, when withdrawn, are subject to the ordinary income tax rate, which for many is higher than the long-term capital gains rate that one incurs in owning a mutual fund, according to Daniel Kurt, writing in Investopedia.

If you buy a qualified annuity – that is, one you purchase with pretax dollars – you’ll have to pay ordinary income taxes on 100% of the disbursements you receive, Kurt noted. With a non-qualified annuity, some of the payment is considered a tax-free return of principal; only the earnings portion is subject to tax.

Stock dividends, by contrast, will be taxed at the capital gains rate rather than as ordinary income.

Trust Point offers the example of someone in a high-ticket tax bracket, who pays 39.6% on gains when they withdraw their money from their variable annuity, instead of the lower 15% or 20% long-term capital gains rates. This will be true regardless of whether the withdrawn dollars are a result of income dividends or capital gains distributions.

In addition, variable annuities can hit the policyholders’ heirs with a big unexpected income tax bill. If a $25,000 investment grows to $100,000 over the years and the policyholder dies, their heirs will owe income taxes on $75,000. If the policyholder is in a lower tax bracket than their heirs, it might make sense for a retiree to take distributions before death if there are no surrender charges.

In contrast, if they owned taxable mutual funds or other securities, the heirs would not have to pay taxes on the $75,000 in gains because taxable mutual funds enjoy a “stepped-up” basis at death for tax purposes, Trust Point noted.

The tax treatment of annuities is one reason why Kurt encourages people to buy as much income protection as needed – that is, expenses minus whatever they receive from Social Security or a pension. That way, you can invest the rest of your assets in an account that benefits from the capital gains rate.

The income guarantees of variable annuities add an expense that can clip the total return earned by the variable annuity investor, according to Trust Point.

As with mutual funds, payments from variable annuities fluctuate up or down depending on the performance of the underlying investments.

Fixed Indexed Annuities

Another choice investors have is the fixed indexed annuity. These annuities use financial indexes as a benchmark for earnings. The funds in the annuity are not directly invested in the stock market. Instead, the earnings are based on the earnings within an index, such as S&P 500, Dow Jones Industrial Average, etc.

(A fixed indexed annuity should not be confused with a fixed annuity, which provides a fixed amount every month for the rest of the annuitant’s life.)

While fixed indexed annuities use stock market indexes as benchmarks for earnings, the investor’s funds are not directly invested in the stock market. Instead, the earnings are based on the earnings within an index.

Like variable annuities, fixed index annuities have both advantages and disadvantages compared to mutual funds and other investments.

While they offer a market-risk-free opportunity, fixed indexed annuities aren’t as liquid as cash, noted Kaye of Howard Kay Insurance.

They are, however, more liquid than most CDs or bonds, Kaye noted. In fact, nearly all offer “free withdrawals” every year. Once the surrender period is over, all of the funds are fully liquid.

Should the policy holder die during the annuity period, it’s possible that there won’t be much left for heirs. Such products are best suited for someone looking to supplement income and already has an estate plan in place for their heirs.

The decision of whether to invest in a variable annuity, fixed indexed annuity or a taxable mutual fund will depend on individual factors such as age, expected lifetime, the reason for the investment, liquidity needs, fees, estate plan and the overall portfolio.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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Is Apple on the Verge of Another Big Revenue Stream?

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As we’ve seen companies start to build out new revenue streams and enter new markets, it has become increasingly clear that the big 5 are turning into huge conglomerates. Amazon is a media company, Google is the dominant producer of mobile operating systems, and Facebook is now talking about blockchain and other expansion possibilities. So with this, Apple is now making the move to become “the Netflix of news” and expanding their Apple News product to include a subscription option.

Apple’s New Business

With slowing iPhone sales, Apple needs another big win in order to maintain their “most valuable company in the world” status. And moving into the news niche isn’t entirely surprising. They did popularize streaming music using iTunes, after all. Then Apple Music came along, which makes Apple News seem like it has a logical evolution to be a subscription service.

The interesting thing about the timing on Apple’s announcement is that Buzzfeed, Huffington Post, and numerous other outlets have laid off journalists recently, so the industry is clearly hurting.

Pushback on the Structure

Controversy has arisen regarding the financial cut Apple is proposing to take. The plan is for Apple to keep 50% of revenue and divide the rest up among the publishers based on the length of time spent consuming their content. Granted, Apple already has the Apple News app, which has proof-of-concept, but publishers are still going to be hurting if they are only entitled to half of the $10 per month fee that Apple is expecting to charge.

Unlimited content for a single monthly fee is a very appealing model for users, and with an estimated 90 million subscribers (potentially delivering more traffic than Facebook), that would give publishers a high number of potential viewers. However, the problems don’t end with the financial aspect. Because of the structure of the app, these publishers wouldn’t have access to the subscription information (e.g. emails or credit card information) which would hinder their back-end marketing abilities.

In business, the back end is usually where the most money is made, and publishers would effectively lose this capability, as well as the ability to retarget using programmatic ads. Apple is planning on designing the app to use an algorithmic selection which doesn’t favour any particular publication. This is good for allowing discovery, but hinders each publisher’s ability to build brand value with readers the way a single subscription would. The differentiation disappears.

Aggregating Customers and Publishers

For Apple, the end goal for all of this is to aggregate a ton of different news suppliers, and then benefit from the same network effects that companies like Netflix thrive upon. Even though Apple News won’t come with the same advertising capability or deliver any traffic to the actual website, it is likely to draw publishers in for one simple reason: they have users.

The fact is, publishers weren’t going to get pageviews from these readers anyways, just by nature of them already using Apple News. Even though there is an intense level of competition and no way to get a direct-to-consumer relationship, it is better than nothing. Aggregators work because users want them, since nobody wants to choose a few publications to subscribe to.

Apple’s success in this endeavor will depend on what publishers do, but it seems like the obvious prediction is many of them will join so as to not miss out on revenue. The publishers with a higher degree of brand value may stay independent, but those will be few and far between.

Where Facebook has had rougher times, and both Amazon and Netflix have been moving in a positive direction, Apple has been relatively stable. This move could represent a swing in the right direction.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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How You Could Profit From The Fairfax County Investment In Morgan Creek Digital

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Morgan Creek Digital recently scored what it says is probably the first investment in the known crypto asset universe from a U.S. pension fund.

Two pension plans in Fairfax County, Virginia are anchor investors in a new $40 million venture-capital fund, according to a statement from the company. Other investors include an insurance company, a university endowment and a private foundation, said Morgan Creek Digital founder Anthony Pompliano, who declined to provide further details.

Fairfax County Retirement Systems manages three separate defined benefit plans, two of which invested in the Morgan Creek Digital fund, said Pompliano. Katherine Molnar, chief investment officer of one of the funds said in a statement that blockchain technology is an “emerging opportunity” that offers an “attractive asymmetric return profile.’’

Morgan Creek Digital, which is an affiliate of the investment manager Morgan Creek Capital Management LLC, exceeded its original target of $25 million for the fund. Its pitch: all traditional assets will eventually be represented by digital tokens, while the influx of intellectual capital into digital assets will create positive returns. It also argues that cryptocurrencies are not correlated to traditional assets, giving investors unique exposures.

The fund created by Morgan Creek Digital in New York is investing in cryptocurrency giant Coinbase, which was recently valued at $8 billion, and several lesser-known startups, including Blockfi, RealBlocks, TrustToken, Harbor, Open Finance Network, CityBlock Capital, Namebase, Good Money and Digital Assets Data.
As much as $4 million of the investment could eventually be used to purchase cryptocurrency directly, though that has not happened yet.

This sort of development is crucial for the digital asset markets to evolve. Let’s take a closer look at Morgan Creek Digital’s other blockchain companies, and see if there might be equity or token opportunities.

CityBlock Capital

CityBlock Capital offered a digital security token sale on the SharesPost platform, representing perhaps the lowest-barrier investment opportunity for someone looking to tag onto the Fairfax County investment in Morgan Creek Digital.

CityBlock’s NYCQ Blockchain Infrastructure Fund invests in companies building blockchain-based capital markets infrastructure. From the instantaneous settlement of trades, elimination of intermediaries, and the reduction of fraud, the fund’s portfolio companies include clearing houses, exchanges, depositories, makers of market aggregation tools, securities services firms, data analytics, smart contract auditors, and issuance platforms. Its focus is early-stage firms, with ten percent of its funds going to late-stage companies.

CityBlock’s digital tokens are designed to represent ownership interests in the fund. Investors will be able to buy and sell these assets on SharesPost’s Alternative Trading System (ATS), which is registered with the U.S. Securities and Exchange Commission.

TrustToken

If you’re looking for a stablecoin, this Morgan Creek Digital-backed option might be a nice tool to escape crypto-volatility. TrustToken’s first token is TrueUSD, a stablecoin redeemable one-to-one for U.S. dollars. Over its initial four months of trading, the coin’s market increased to $85 million as investors look for stability in the unstable world of crypto. The token has a $61 million hard cap on the token allocated over three tranches of $0.12, $0.14 and $0.16 per trust token.

In the TrueUSD system, dollars are kept in the escrow accounts of multiple trust companies, not a bank account. Those accounts verified by an independent third party that issues monthly reports on the funds held in collateral.

Blockfi

In need of liquidity and have a lot of crypto you could put up as collateral? Blockfi is now operating in the US, and could be the business solution you need. BlockFi is a New York-based secured non-bank lender of  USD loans to cryptoasset owners who collateralize the loan with cryptoassets. Blockfi iquidity is available to both individuals and institutions. Client Bitcoin and Ether is held with a registered custodian. Loans are issued in USD to their bank account.

BlockFi currently operates in 35 US States, lending to retail investors and companies. It raised approximately $1.5 million in seed funding earlier this year from ConsenSys Ventures, SoFI and Kenetic Capital, followed by Galaxy Digital Ventures investment of $52.5 million. $50 million, the lion’s share of the capital, will be used to loan to BlockFi’s customers. The remaining $2.5 million represents an equity investment in the company from Galaxy and earlier backers.

Namebase

Namebase offers probably the most unique idea in which Morgan Creek Digital invests. This platform enables the registration of top-level domains on the Handshake blockchain. As a fork of Bitcoin, Handshake allows users to register domain names. Registration records are maintained by a decentralized network of nodes. Handshake is compatible with the existing domain name system. It is easily integrated with mainstream browsers.

Handshake uses the Bitcoin software with some extra transaction types allowing users to bid on names on-chain. Handshake forked everything about the Bitcoin node software while not forking the UTXO set, like in the case of Zcash. The Handshake project plans to distribute 70% of the coin supply to open source developers, projects, and non-profits without any contractual expectation of work.

Bakkt

The Bakkt Bitcoin Daily Future is a physically delivered daily futures contract on Bitcoin traded in BTC/USD. It’s still subject to regulatory approval, but ICE plans for them to be traded on its electronic trading platform which is regulated by the CFTC. ICE Clearing US, the main counterparty for all ICE cleared forex futures trades, will clear and guarantee all trades, to be settled in physically delivered Bitcoin “in the regulated Bakkt Warehouse.”

Bakkt raised $18.2 million to develop a global digital assets platform and a bitcoin futures product. Owned by Intercontinental Exchange (ICE), which in turn is owned by the New York Stock Exchange (NYSE), Bakkt’s investors include Boston Consulting Group, Galaxy Digital, Goldfinch Partners, ICE, M12 (Microsoft’s VC fund), Pantera Capital and Protocol Ventures.

Digital Assets Data

This financial technology and data company build enterprise-grade software and data feeds for crypto hedge funds and other market participants. The companies data, information and transparency tools will be applied to crypto assets, including currencies, platforms, applications, side chains, security tokens, and initial coin offers (ICOs) through subscription services offered to hedge funds and other institutional investors.

Harbor

While companies like Polymath stole much of security token show in early 2018, Harbor’s blockchain-based platform and compliance protocol has also been built to transform private securities like commercial real estate offerings an investment funds into more liquid forms of private investment.

This institutional-grade onramp for issuers and investors is an end-to-end service. Investor on-boarding to the platform encompasses KYC, AML, accreditation and tax forms, signing of documents, funding, and other tasks. The Harbor compliance protocol manages complex rules and regulations governing securities on issuance and secondary transfers.

Open Finance Network

Created in 2014, The OpenFinance Network (OFN) uses blockchain technology to create an U.S. regulated security token platform. “We wanted to give users the control over their funds. Since with security tokens, there is a lot of overhead holding tokens on a centralized platform. So to put capital to better use, we went with self-custody. We are not entirely decentralized though, and we think this is attractive to all types of users.”

Open Finance Network is comprised of the ledger, the token and the adaptors. Open Finance’s a global registry of assets that are represented by security tokens as well as entities such as broker-dealers, transfer agents, custodians or escrow agents that can be used on different security token processes.

Good Money

Good Money is a new type of banking platform founded by Gunnar Lovelace. When a new customer signs up with Good Money, they receive an equity share – in other words, they become co-owners. Lovelace says customers could hold as much as 70% one day.

Good Money operates similar to a credit union, which are non-profits, and offers members no ATM or overdraft fees. 50% of its profits are invested into green projects and charitable donations. The platform’s customers vote on where profits should be invested, but the options will only include sustainable investments, like clean energy and reforestation efforts.

RealBlocks

RealBlocks is creating a real estate capital markets platform designed to connect users globally so they can more easily raise capital for real estate. Built on the Ethereum blockchain, the platform allows organizations to raise capital through the issuance of tokenized securities.

On the platform, investors can directly purchase ownership interest in real estate with digital and fiat currencies. The platform also claims to provide a mechanism for peer-to-peer liqudity. According to RealBlocks, “anyone in the world is now able to directly invest, raise capital, and obtain liquidity for investments in real estate.” The platform also provides a mechanism for peer-to-peer liquidity. By using RealBlocks, anyone in the world is now able to directly invest, raise capital, and obtain liquidity for investments in real estate.

Conclusion

“There’s a belief in the institutional world that if the industry will be around for a long time, it will be very valuable,’’ Pompliano said in a phone interview. “The smart money is not distracted by price but looks at the long-term trends, and believes they’re betting on innovation as a great way to deliver risk-mitigated returns.’’

Today, even police officers and other state employees in Virginia’s Fairfax County are now looking forward to retirement with potential dividends from bitcoin. Two separate pension funds that collectively manage $5.1 billion in assets for the state’s police force and other employees have joined a $40 million investment in the Morgan Creek Blockchain Opportunities Fund.

If you look at the startups in which Morgan Creek Digital is invested, there are few token options. Using TrueUSD to hedge your crypto-investments offers one opportunity to augment your investment strategy. More interestingly, the CityBlock Capital security token represents an alternative to other VC-backed securities tokens, such as Blockchain Capital’s BCAP.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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5 stars on average, based on 2 rated postsJustin O'Connell is the founder of financial technology focused CryptographicAsset.com. Justin organized the launch of the largest Bitcoin ATM hardware and software provider in the world at the historical Hotel del Coronado in southern California. His works appear in the U.S.'s third largest weekly, the San Diego Reader, VICE and elsewhere.




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Electric Minerals: Tesla, Chrysler Feel the Heat as African Nations Demand Bigger Cut

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Officials from mineral-rich African nations met with representatives from the ‘big mining’ industry at the Mining Indaba investment conference in Cape Town this week, with each hoping to make headway amid newly-simmering economic tensions.

Those tensions have been fuelled by a realization on the part of certain African nations that they now hold all the cards when it comes to producing minerals essential for the manufacture of electric vehicles.

As such, countries like Democratic Republic of Congo and Zambia have demanded a bigger piece of the pie from mining companies, so much so that the CEO of multi-billion dollar mining company, Barrick Gold, has already labelled the situation ‘untenable’.

This economic standoff threatens to makes itself felt in the U.S, where both political and financial pressure has already hit electric car manufacturers hard – in the balance books and on the assembly lines.

Africa Wakes Up

Electric cars use almost ten times as much copper as conventional cars – 185 pounds compared to around 18 pounds. The amount used in the production of electric busses is a staggering 800 pounds.

Zambia recently raised taxes on copper by 5%, and announced plans to add a further 10% if (when) the price of copper exceeds $7,500 per tonne. Currently, a tonne of copper costs $6,200 on the world market.

When Barrick Gold CEO, Mark Bristow, called the situation untenable, he was referring specifically to demands made by Tanzania and Democratic Republic of Congo. The Tanzanian government is currently attempting to squeeze a $190 billion tax payment from gold mining company, Acacia. Meanwhile, the DRC continues to flex as many muscles as it can, safe in the knowledge that the modern world relies on its cobalt and tungsten.

With western nations, and particularly the eurozone, making strong commitments to converting to green energy in the coming decades, electric car firms now find themselves being pushed and pulled in several directions.

On the one hand, they must innovate quickly enough to keep pace with government fuel efficiency targets; while on the other they must balance the environmental and financial cost of acquiring the minerals required to make their machines more efficient.

Playing Hardball

Both Tanzania and DRC refused to send any delegates to the Cape Town conference; instead choosing to dig their heels in and stick to their guns.

The President of Ghana, Nana Akufo-Addo, was present at the conference, and as custodian of Africa’s second largest gold reserves, Addo spoke up in favour of African nations getting the best deal possible. He said that international companies should no longer expect any special relationships or deals from African nations, and that:

“…The people of Africa do not have to be poor for others to be rich.”

Major mining companies voiced concerns that they would be forced to shut up shop and find somewhere else to mine for minerals. Some have even gone so far as to begin exploring new ways to make electric vehicles which don’t rely on Africa’s conflict minerals.

Tesla Effect

Tesla’s Elon Musk has been very vocal about the fact that his company has to move away from reliance on the ‘Blood Diamond of Minerals’ (cobalt), and that the next generation of Tesla vehicles would not use any at all. Last year he tweeted:

“We use less than 3% cobalt in our batteries & will use none in next gen…”

Last year, an analyst at Benchmark Mineral Intelligence, Caspar Rawles, described how cobalt use has already been greatly reduced by the likes of Tesla and Panasonic – but that they may have reached a ‘bottom’. He said:

“Tesla uses a formulation called NCA (nickel, cobalt, aluminum) that is already very low-cobalt. Over the last six years, Tesla and Panasonic [which supplies batteries to Tesla] have reduced cobalt dependency by about 60 percent already. That’s already very low. We think it’s going to be difficult for them to go much lower because you run into engineering problems.”

New Sources?

Cobalt isn’t a problem in itself, it just so happens that some of the most mineral-rich nations also happen to be mired in decades-old conflicts and civil wars. And those are often exacerbated, not helped, by the influx of foreign money.

But in 2017, Tesla made moves into the small Canadian town of Cobalt – which has, as it happens, a huge supply of… cobalt. As quoted in Bloomberg, Roger Bell, director of mining research at London-based firm Hannam & Partners, said:

“Anybody who has cobalt outside the DRC is in a better situation because carmakers are very worried about their supply chains.”

Within months of the move into Cobalt, two cobalt mining companies saw their stock rise from between 90% and 600% – purely on speculation, and despite having zero revenue at the time.

Breaking the reliance on African minerals is a major goal for global manufacturers, and Tesla’s Conflict Minerals Report from 2017 aimed for the same:

“Tesla does not and will not accept human rights abuses in our supply chain. While Tesla’s responsible sourcing practices apply to all materials and supply chain partners, we recognize the conditions associated with select artisanal mining (ASM) of cobalt in the DRC.”

Tesla published the names of all of their supply chain interactions in the report, and filed it with the Securities and Exchange Commission in the same year. Tesla has been one of the ‘cleanest’ operators when it comes to conflict minerals, but its two rounds of worker layoffs at the end of last year – including over 50% of its delivery force – highlights the difficult industry it finds itself in.

Fiat Chrysler Coughs Up

Italian-American car company Fiat Chrysler recently felt pressure from the other side of the fence, when it was forced to pay a $77 million fine for failing to meet fuel efficiency requirements in the United States.

The FCA (Fiat Chrysler Automobiles) stock price sunk 15% in the past week, and is only now starting to rebound. A gap between financial targets and economic reality caused the stock price to drop, and FCA continue to lobby the Trump administration for a relaxing of fuel economy laws. Fiat Chrysler say the laws target them unfairly due to their cars increased default size and bulk compared to cars in the general market.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 147 rated postsGreg Thomson is a full-time crypto writer and digital nomad. He eats ICOs for breakfast and bleeds altcoins. Wherever he lays his public key is his home.




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