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1. Lesson: The Global Game

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To be able to get ahead of the curve and take smarter financial choices, it’s necessary to understand how our current financial system works. The fractional reserve system (see Fractional-reserve banking) that was established by the Swedish central bank in the late 1600s is a system that lets banks create money “out of thin air.” The golden rule is the 9 to 1 ratio: banks only need to hold 1 part of the money while they can supply 9 parts (~11% is held as a reserve).

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As an example:

If you deposit 100 USD in a bank account, that bank can lend out 90 USD. If the borrower deposit the same amount in another bank account, the bank can lend out 81 USD on top of the 90 USD it has already lent. This process will continue until the bank has lent out 900 USD based on the original deposit of 100 USD. The bank only holds 100 USD but has created 800 USD out of thin air.

Why is this important to know?

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The system is built as an “air castle.” It can create money out of “nothing” and add an interest rate on top of it. If you do not have the right knowledge about how the system works, it will be hard to maneuver in the economic landscape. You have to understand that banks are not playing by the same rules that ordinary businesses and people do. We have to pay back our loans unless we want to file for bankruptcy. The fractional reserve system is a good system to speed up the economic process, but it is not durable.

The interest rate

When I want to enlighten my peers on how interest rates work, I always use the same thought experiment:

Think of a world that only had one bank which created all the money in the world. Their first customer would like to lend an amount, let’s say $1000. The bank lends out the money with an interest rate of 10% per year. Within one year, the customer has to pay back $1100.

Do you see the problem here?

There are not enough money to pay back the loan with interest as there is no more money in circulation. So what does the customer do? He has to borrow more money to be able to pay back the loan, but by doing so he increases his overall loan. The interest rate makes the loan “unpayable.” In a financial system where the interest rate is fundamental, there will never be enough money to pay back the loans. There will always be defaults and bankruptcies.

In the bigger picture: Look at the US National Debt. The US might be able to pay back their national debt, but they will have to cut expenditure from other posts which in turn will significantly hurt the world economy. This can be even worse than to let the debt increase and raise the invisible “debt ceiling.”

The world economy is “tricked” into a global game of debt. The world’s debt can never be paid back entirely, and there will always come financial meltdowns followed by mass bankruptcies.

The ones that benefit from this system is banks, lenders (the rich guys), and businesses that are able to operate in such a system.

What does this mean for me?

The essential knowledge you can take from this is to “join the global game.” If you do not have money to lend out with an interest that is higher than the inflation rate, or money to invest in different index funds (never invest in a single stock unless there is a 100% guarantee of growth) you will end up losing money, year by year.

The system is bad, I know, but we cannot fight the powers in place that profits from the system (unless something amazing happens and a new system replaces the old).

OK: So you got a good job and receive salary month by month. “I do make money!” Yes, you do, but you are still losing money, money that could have been used to grow your economic backbone. And what happens when you are fired or the company you work for files for bankruptcy? You are left with nothing and your assets will soon be gone.

My first advice is this:

If you do have a job where you receive a monthly salary, put 10% of your salary in a robust index fund and leave them there. Set this up automatically on a monthly basis and “forget them.” Then you will at least be joining the global game and take low risk. You can also choose to invest those 10% in different assets, like bitcoin, but then you would take a significantly higher risk and stand a chance to lose it all.

The most important thing to remember: NEVER LOSE MONEY.

Continue reading: 2. Lesson: Never Lose Money

Please make a comment if you have any inputs.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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3 Comments

3 Comments

  1. rbrito

    June 6, 2017 at 4:16 pm

    If i has the opportunity to read a least this article about 1 months ago i wouldn’t loss 12 btc. Learn how important is to be financial educated and not to to business base on emotions.

    • 4feichu

      June 23, 2017 at 11:52 pm

      just curious so I can learn from your mistake, how’d you lose the BTC?

  2. NoHomeJerome

    August 15, 2017 at 11:20 am

    Thank you, Edward.

    Do you suggest investing in an index fund in addition to any cryptocurrency investments? Or do you suggest we pick either one, depending on personal preferences and risk-aversion levels?

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Fidelity Investments is Mining Cryptocurrency

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Fidelity Investments is a multi-billion dollar brokerage  that just so happens to be mining cryptocurrency. In fact, it has been at it for three years, using its own computers to harvest bitcoin and Ethereum.

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Profitable Experiment

CEO Abby Johnson recently told Fortune that its U.S.-based mining operation is “making a lot of money.” This comes despite running a relatively modest operation.

Hadley Stern, Senior VP of Fidelity Labs, described his company’s venture as an “experiment.”

The real reason we began mining, and still do, is to learn how the network works, how consensus works, how difficulty levels work,” he said in reference to the mining process.

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The key to profitability has been the dramatic rise in cryptocurrency over the past year. Bitcoin and Ethereum are the world’s No. 1 and 2 cryptocurrencies by market capitalization, and no-one else comes close.

Well Ahead of the Pack

The fact that Fidelity has been at this for three years speaks volumes about the company. Other, much bigger players are still dipping their toes in the market, but are unsure about how to proceed. Goldman Sachs is reportedly on the fence about starting a cryptocurrency trading operation, while J.P. Morgan has already begun handling customer orders for bitcoin-based instruments.

Fidelity is doing a lot more than just mining tokens. Earlier this year, it reached an agreement with Coinbase to let customers view cryptocurrency prices alongside other assets on their Fidelity homepage.

Coinbase is the world’s most funded cryptocurrency exchange with more than 7.4 million users.

Cryptocurrency Prices

The cryptocurrency market ended the week on a firm note, with bitcoin (BTC/USD) reaching a session high of $4,425.00. At press time, the index was up 1.6% at $4,368.

Ether is also trading higher against the dollar, with the ETH/USD rallying more than 3% to $305.

Ripple (XRP) lost momentum on Friday, but still managed a weekly gain of 21%.

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Chinese Government Eyeing Fresh Bitcoin Legislation?

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The Chinese government could roll out fresh cryptocurrency regulation in the coming months permitting licensed brokers to operate, based on recent information from Xinhua.

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The state-owned news publication recently revealed that the government is mostly concerned with stamping out illegal activity involving bitcoin and other cryptos. Government authorities could be planning to regulate the market by creating a licensing program with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems.

The Case for AML

The need for KYC/AML protocols has long been raised by cryptocurrency proponents, especially in reference to initial coin offerings (ICOs). In response, the blockchain community has come together to create the Simple Agreement for Future Tokens (SAFT). The SAFT is both an instrument and open-source framework for token sales that vets accredited investors.

SAFT activity is quickly gaining traction, with the likes of Gizer recently issuing a presale of its ICO through SAFTLaunch.

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SAFT was officially created by Protocol Labs in close collaboration with AngelList and Cooley.

China’s Stance Looms Large for Cryptocurrency Market

Although digital assets have recovered from the China-induced flash crash of September, favorable regulations on the mainland could mean big business for bitcoin exchanges. Prior to the ban on ICOs and bitcoin brokers, Chinese investors were responsible for a quarter of all BTC trades.

According to Xinhua, China is likely to pursue a licensing program similar to Japan, a country that recently approved 11 cryptocurrency exchanges. CnLedger, a leading source of cryptocurrency news in China, recently had this to say:

“Xinhua News, official press agency of CN: Virtual currencies have become the top choices of underground economies. We shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.”

Is China’s cryptocurrency ban temporary? It certainly looks that way. Regulators must already know that the ban hasn’t stopped mainland investors from buying cryptocurrencies next door in Hong Kong or Singapore. A saner approach to an all-out blanket ban is a tighter regulatory framework that will stamp out money laundering and other underground activities.

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Analysis

Tim Draper Has Made Over $110 Million Since 2014 With his Bitcoin Investment

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Tim Draper, the billionaire technology investor and prominent venture capitalist who has invested in some of the most successful technology startups in the likes of Coinbase, Patreon, SpaceX, Tesla, Box, FourSquare, has profited over $110 million from his investment in bitcoin less than three years ago.

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In 2014, Draper participated in the auction of 144,336 bitcoins by the US government and the US Justice Department, which were seized during the investigation into Silk Road, a dark web marketplace. Draper was granted the permission to purchase a batch of 30,000 at around $600 from the US government.

Upon securing 30,000 bitcoins, Draper told Fox Business:

“[I’m] very excited about bitcoin and what it can do for the world. Bitcoin is as big a transformation to the finance and commerce industry as the internet was for information and communications. If bitcoin were here in 2008, it would be a stability source for our world economy. Everybody should go out there and buy a bitcoin. Every investor who’s a fiduciary should at least be partially involved in bitcoin because it’s a hedge against all the other currencies. There’s a whole ecosystem being built that’s going to make commerce much easier with much less friction and safer.”

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Today, Draper’s 30,000 bitcoins are worth $129.9 million. Considering that Draper had spent $19 million purchasing the batch of 30,000 bitcoins in 2014, Draper has recorded a profit of over $110 million in less than three years.

While Draper held onto his investment in bitcoin, the US Justice Department was quick all of the 144,336 bitcoins seized during the Silk Road operation. According to various sources, the US government sold the majority of its 144,336 bitcoins at a price of $336, at $48 million. If the US government had sold its bitcoins in 2017, it would have generated an additional profit of around $573 million, as 144,336 bitcoins at today’s bitcoin price of $4,330 are worth $624.9 million.

Bitcoin price was below $350 in 2014. Today, it is over $4,330.

Since 2014, in addition to purchasing tens of thousands of bitcoins, Draper has funded some of the most successful bitcoin companies in the cryptocurrency market including Coinbase and Korbit. Earlier this year, Coinbase secured a $100 million investment at a $1.6 billion valuation, while Korbit was acquired by the parent company of a $10 billion gaming company in Nexon at a $140 million valuation.

Furthermore, Draper has not sold his stake in Coinbase and earlier this year, Brian Armstrong, the CEO of Coinbase, revealed that Coinbase is still at an early stage in terms of developing and scaling. Armstrong noted that it will evolve into the safest and most trusted exchange in the global market.

“Digital currencies are having their ‘Netscape’ moment. The pace of innovation has been accelerating and we are now seeing exciting projects and companies being built on top of digital currencies. We’re beginning to transition into phase three of our secret master plan. Our goal is to be the safest, most trusted and compliant, and easiest to use. Not the first to market with new assets. Especially at scale, it takes time to ensure any new asset we add is well tested and secure,” said Armstrong.

Coinbase is also one of the two exchanges in the US market apart from Gemini that is targeting institutional and retail investors by providing sufficient liquidity. As Coinbase and its flagship cryptocurrency trading platform GDAX continue evolve, Draper will position himself at the forefront of cryptocurrency innovation and disruption.

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