Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Friday, November 19, 2021

How and WHY are you buying Bitcoin?

Recently, a Bitcoin Futures ETF has been approved for trading on US stock markets. This represents just another way that you can get exposure to the price movement of Bitcoin as a US investor. Here are just a few:

The first and most "pure" way to access Bitcoin is to own and hold it directly. You can purchase through an exchange, like Coinbase or Gemini, who will hold it in an account, or "hot wallet." This wallet has a unique "address" and a private key which only you know. While anyone can see your address (so that they can send you more Bitcoin!) your private key is what makes it yours only. Keeping it in the hot wallet on an exchange is simplest, and most familiar to those who now brokerage accounts already. This is a little different from the "cold wallets" discussed later.

Maintaining a wallet can be difficult for some. As this is a new technology, most people will likely need a good bit of help getting started on this sort of system. Interacting with the broader crypto-economy will likely have more steps and complications than other methods. Much like buying stock directly from a transfer agent, you have direct ownership, but less convenience than using a broker.

A crypto broker or exchange will allow you to hold crypto in an account that they secure and monitor. This typically offers convenience and features that are not available for a wallet. Much like having a stock brokerage account, you can view your holdings in one place, buy, sell and transfer with ease. There are even regular stock custodians like Interactive Brokers or Robinhood that allow you to trade some crypto within a traditional stock brokerage account.

Stepping away from the actual coins, there are several ways to get exposure to the price swings of bitcoin without actually holding the coins yourself.

The new ETF from ProShares, BITO, tracks Bitcoin futures. Futures are contracts to buy a commodity, in this case, a digital commodity, at a later date. If a contract is only a few days or weeks away, the value of the contract will generally be very close to the value of the underlying commodity. This can be a way to get the same general exposure, but it isn't perfect. As new contracts are purchased, there will often be price discrepancies due to the dates of the contracts maturity, regulatory issues or supply and demand.

For short term trades, this is probably an acceptable way to get exposure to bitcoin price changes. Over time, however, the price discrepancies can add up to significant slippage.

In the US, there are no ETFs or Mutual Funds that own Bitcoin directly - yet. There is, however, a trust that trades over the counter that almost anyone can buy called the Grayscale Bitcoin Trust, ticker GBTC. Since the trust holds nothing but Bitcoin, the underlying value will accurately reflect the value of Bitcoin, less a fee. However, since the trust trades freely with no arbitrage mechanism, it can trade at a significant premium or discount to the value. As I write this, for example, Bitcoin trades at $60,264 and there are 0.00093361 Bitcoin per share of the trust. This implies a trust value of $56.26, yet it last traded at $47.07 - a discount of over 16%! While this means that you can buy Bitcoin on the cheap right now, there is no promise that you will ever be able to sell the trust for 100% of its value. Grayscale offers a series of trusts like this that offer exposure to many aspects of the crypto economy!

Another similar fund is the Bitwise Crypto "index fund" BITW. Accredited investors can buy this at intervals directly from Bitwise, allowing them to buy

Why can't Americans have a Bitcoin ETF - after all, Canadians have one! Each ETF has to be approved by the SEC, while I do not know their thinking, I suspect that the reliability of pricing and trading is a top concern, as ETFs must have an arbitrage mechanism to keep their price close to their value. As evidenced by the wild swings in the premium or discount of the existing funds, this may be a top concern.

We can step away from trying to get direct exposure to the price of the coin, and try to profit from the growing crypto economy instead. There are many companies that participate in mining, trading or using bitcoin in some way. You can even buy ETFs that specifically look for those companies. The idea is that as bitcoin becomes more important and more widely used, these companies should profit from that increased activity. There are even major companies like Square, PayPal or Robinhood that let users hold and trade Bitcoin. While they profit from other lines of business, they certainly are exposed to the crypto-economy.

Lastly, I would be remiss to not bring up the company Microstrategy, Ticker MSTR. This is a software and technology company that started buying Bitcoin to hold on their balance sheet. They currently have about $7 Billion of Bitcoin and the entire company is with $8 Billion. They still do carry on with their normal business and they have debt on the balance sheet, but there is interesting exposure to Bitcoin nonetheless.

Mechanically, the steps that you take to invest in bitcoin are still a little less familiar than investing in stocks. Some of this complexity may remain a feature of the crypto-economy as security and self-custody remain fundamental aspects of Bitcoin. Some of that will change, but just like investing in stocks, there will be many ways to gain exposure to the price movements of Bitcoin.

Importantly, if you want to invest in Bitcoin, you have to consider why, and what the best way to gain that exposure is. For instance, if you want to trade the price swings, the new Futures ETF may work well within your current trading account. If you believe in the long term transformational power of Bitcoin, maybe a self-custodied, cold wallet is most appropriate. Popular cold wallets like Tenor or Ledger keep your coins out of your "hot" exchange wallet for more security. If you think that the crypto economy will keep growing, but don't know what coin will be best, there are funds of crypto-adjacent companies you can invest in.

Bitcoin, the broader crypto-economy and it's derivatives are very new and changing very rapidly. Nothing in this post is or should be construed as a recommendation to purchase or invest in bitcoin or any related investments. If you have independently arrived at the conclusion that crypto investments are aligned with your values and goals, this may be a useful guide for determining how exactly to make that investment.

Your Spending and Your Values

As an opinionated personal finance expert still in my 30’s, I absolutely had to respond to this:

Growing up, I was always a saver. I collected my pennies, nickels and dimes to open a savings account when I was in kindergarten. I quickly learned to value earnings from work. My parents paid me to do extra chores and supported me when I got a job bagging groceries when I was 15. From a young age, my dad had planted the seed of interest in investing when he told me that foundational tale of my sister owning shares of The Coca-Cola Company. 

Suffice to say, when I was in my late teens, and certainly by my twenties, the basics of sound personal finance were as natural to me as breathing. I’ve worked hard, been frugal with my spending and careful with my saving.

The one thing that I didn’t quite understand was value.

Values are those characteristics, qualities and principals that you are willing to pursue harder and stand up for longer. Values go beyond addressing your basic needs, they go beyond your relationships. Your values define your very being. When your actions and lifestyle are in alignment with your values, you are living your best life. When they are out of alignment, you may notice feeling uncomfortable or just not quite right.

If you value something - you should be willing to spend your time, energy and money to pursue it.

As someone who is generally frugal, there have been times that spending an extra dollar pained me. However, there have been missed experiences that now pain me - even though I saved many more dollars. That is not to say that I have not spent and enjoyed my money at all, but I look back and ask myself why I didn’t spend a few extra dollars to eat at a fascinating top rated restaurant or avoid an adventurous weekend outing.

My life savings at age 25 were a tiny part of my overall financial picture. Most of the money I would ever have had not even been earned yet! Had I spent every penny that I had then, I would have bought myself incredible experiences that I would still treasure today. I did make the right decision to save that money, but my mistake was in not identifying what would be important to spend it on.

Could I have corrected this? A deep and honest assessment of my values would have helped. I was halfway there - I did not spend frivolously on things I did not appreciate. I was intentional about the time I spent, the home I bought, the investments that I made. On the other hand, I missed out on opportunities that would have brought me great joy and fulfilment, my money accrued with no realistic expectation of being spent.

I don’t regret saving my money - I do regret not spending on things that are more important than that money.

There is a balance, of course. At any age, having emergency savings is important. You should be able to save a dollar off of even your very first paycheck. The trick, however, is knowing what the highest and best use for that dollar is. 

Through the years, I have helped clients identify and understand their deepest values.  I have seen people transformed by saying yes to an opportunity that they truly valued, or no to a part of their lifestyle that didn’t align with those values. I have showed them how they can spend on the things they truly cherish, living a more bountiful and more financially secure life because of it. Further, I have studied the very concept of values and the conversations that bring them to light.

Money is more important than simply having it. Money is an expression of all of the work we have done to earn it. It is the result of our patience in waiting for it to grow. It is the gift of those who came before us and left something for us. Yes, it takes money to eat, drink and keep a roof over our heads, but it is how we do those things that is truly important.

We can't get back the misspent dollars of our youth and exchange them for experiences and investments we still cheris. We can make sure that our future spending is in the right place. Take time to think about their values. A guided conversation with your advisor can help draw those out. Have those conversations. Spend and live in a way that aligns with those values - live your best life!

Insurance Series - Post 3: Home Base

Our home is the physical center of our lives. It shelters us. It houses our possessions. It's where we spend time when we have no where else to be. It can even be where we put together a family baseball game! Many of us are buying, remodeling, building or have dreams of doing these things. All of these are investments of our time, energy, money, and future. But, are they adequately protected? Maybe not.

Most people believe house insurance has but one question:  Do you have it? Yes? Ok, I'm good to go. But, are you? I realize it's not leisure reading to sit down with your homeowner's insurance policy and read through it. It's not a novel. It's more of a gameday playbook you should be familiar with. It can be understood. But, it helps to have some coaching and practice. 

There are pieces to a homeowner's policy that you should educate yourself about.

  • Do you know how your insurance company will determine what to pay on a claim?
  • If you remodel your home, you may need to increase your insurance coverage. Did you know that if something happens to your newly remodeled home, your insurance company may deem your home underinsured and would pay less in the event of a claim?
  • Your homeowners insurance protects your other assets too. If your dog gets too excited and accidentally injures someone on your daily walk, does your policy adequately protect your savings and investments?
  • Or, maybe you are considering a pool for next summer. How will that affect your coverage? Or if you do put together that family baseball games and someone gets hurt, are you covered? 

If you can't answer these questions, or you do not feel thoroughly confident in your home insurance facts, now is the time to change that! Visit your trusted insurance agent, then schedule time with someone at New Perspectives. While we do not sell insurance, we can help you decide the coverage that best protects your home, your peace of mind, and your financial future. So, you can feel SAFE at your home base!

Wednesday, November 10, 2021

Chicken Little

The sky is falling! The sky is falling!


Or is it?


We just got the latest numbers on inflation. The data show that inflation increased 6.2% for the 12 month period ending in October of this year. That’s WAY beyond the historical average of 3% annually and stirred up the inflation ghosts of the 80s.  While we take inflation pressures seriously, we find there are some mitigating factors here and some variables that mean these numbers will moderate.


First, this is being measured against the twelve months ending in October, 2020, when we were, mostly, in pandemic mode. Much of the twelve months from November, 2019, through October, 2020, were spent in full or partial lockdown. That means we are measuring from a low point. The previous inflation rate for that period is 1.2%, much lower than the historical average.


And what determines prices? Supply and demand. And we have some weird things going on for both sides of the equation.


On the supply side, we our seriously bogged down. Factories are trying to gear back up to full steam. Ships are backed up at ports. There are not enough drivers to deliver goods. There is a multitude of variables contributing to the mess, but it’s not permanent. Gradually, we will see  the chain unkink, but, right now, inventory levels are low. Want the hottest Christmas toy? You’re going to pay big bucks.


And what of the demand side? We’ve all been hunkered down, spending less and accumulating more. As my mother used to say, “The money is burning a hole in our pockets.” And we’re not just buying stuff. Now, we are buying experiences—booking travel like there’s no tomorrow.


More people chasing fewer goods/services. It’s a recipe for classic inflation. But will we keep spending like drunken sailors? Probably not. Things will slow down. We’ll get it all out of our system and settle back into normal patterns.


And what about the biggest cost of business? Labor. Well, we are waiting to see how this pans out. Yes, the labor market is tight, and wages are increasing. Will they stick? In some cases, yes. In areas with a lot of turnover, maybe not.


Ultimately, we believe prices will moderate, but don’t expect to go all the way back down to earth. For the last decade, inflation has been in the 2% range or less. We expect it to go above historical levels in the next year or two and hover in the mid 3% range. That’s highER inflation but not HYPER inflation.


So, when it comes to inflation, it’s a little cloudy, but we don’t think the sky is falling.