Learning Better Investment Habits. Bitcoin Tech Talk #237
During a bull market, new buyers look for dips to stack, but then when the dip inevitably comes, many shy away and don’t stack. We’re in the middle of one right now and it’s clear that many people just don’t know when to buy. They think that it may head lower and would feel stupid buying now should it do so.
The sad reality of newcoiners is that many simply don’t have a very long-term view. They are very sensitive to 5-10% moves in the short term and not very sensitive to the 200-1000% moves in the long term. This is a mentality that’s been brought over from fiat, where the few percentage moves make a long-term difference.
This is what I want to explore today, how our fiat investing habits hinder Bitcoin adoption. Here are three habits that we need to shed before going all-in on Bitcoin and it’s something that I hope we can encourage newcoiners to adopt.
The first bad investing habit is variance reduction. This can be done a multitude of ways but diversification is the main way. This is a habit that we’ve picked up because there’s no good store of value. The only way to imitate that is to put money into lots of risky assets. As risky assets get more investment, the Fed removes this risk through bailouts. This has essentially taught the market to expect little to no variance. Unfortunately, removing volatility also limits upside quite a bit as risk and volatility are two sides of the same coin. Variance reduction looks worthwhile when inflation is believed to be in the 1-2% range. As the lie of CPI gets exposed, it’s obvious that a 1-2% return on your money simply does not store value very well. Real inflation is monetary expansion and that’s been around 7% annually since 1959 (as measured by the USD M2 money supply). Volatility reduction makes people feel safe, even if it’s as a result of having their money stolen from them.
The second bad investing habit is outsourcing research. This is understandable since in the fiat system, keeping your money is as much a job as making your money. Outsourcing investments, whether through mutual funds, hedge funds or family offices frees people up from this responsibility. Unfortunately, this is a major tax on wealth as not only will outsourced investors try to reduce variance and thus reduce gains, but also charge a good deal of money. Financial investment professionals exist at all levels of the economy to invest other people’s money. That they can charge so much shows that there’s a deep culture of wealth extraction from savers. Outsourcing is ultimately the result of people’s desire to create goods and services instead of micromanaging their money. As saving becomes easier through Bitcoin a lot of this tax can be put toward better use and a lot fewer investment professionals will be needed.
The third fiat investment habit is thinking that investment is more like gambling than saving. Fiat money puts every saver in the position of having to take lots of risk with their money in order to store value and when combined with a lack of research, is indistinguishable from gambling. Leveraged derivatives make “investment” way more exciting than any casino game and more convenient to boot. For well-connected people and businesses, risky investing behavior is incentivized with bailouts. For everyone else, speculation is an addictive trap that they can easily fall into because of the need to take risk in a fiat economy. With Bitcoin, savings is much easier and for those of us that have been in the space for a while, other investment vehicles begin to look a lot more like gambling. Bitcoin creates enough incentives to save that gambling on investments becomes less attractive.
Variance reduction, outsourcing of research and gambling are unfortunately behaviors that people new to Bitcoin engage in. Altcoin bubbles form in large part because of these bad habits picked up from fiat money. Thankfully, people learn after being in Bitcoin a while that these are not productive behaviors. Instead, saving in Bitcoin by providing goods and services to others is best long-term. In other words, Bitcoin fixes these bad fiat investment habits and builds civilization through its incentives.
River Financial has published a great 101 on Taproot and all the benefits it brings. This is a very common question for those that are interested in Bitcoin but don’t necessarily know the technical details. They do a great job of outlining the benefits of Schnorr Signatures, the various Tapscript mechanics and the privacy enhancements of Taproot. Recommended for everyone, but for developers especially, as there’s likely going to be a lot of questions about this from normies going forward.
Keep-it-simple Bitcoin has published a security guide for those that want to do Bitcoin the right way. This is another big question from those going down the Bitcoin rabbit hole. In particular one of the most asked questions is “how do I custody my own coins?” and this guide goes through how to set up a hardware wallet and testing everything. I like how step-by-step it is and hopefully, this gets more people used to not trusting third parties with their coins. This is an excellent resource to send to your new-coiner friends who are asking these questions.
Bitcoin Dev Kit has published a new way to do paper wallets based on wallet descriptors. This is a great way to back up more complicated wallets, as anything that can be written as a wallet descriptor can be backed up. This includes multisig or much more complicated schemes. In particular, this looks very useful for Schnorr as the entire script part of Taproot can be efficiently encoded as a descriptor and backed up in a reasonable way. Now if only a metal seed backup manufacturer would make something that I can put this on…
Lightning developers are holding an IRC workshop for making some improvements to the protocol. The main reasons for this meeting are to discuss the tx-relay and mempool rules to reduce the possible attacks on Lightning opening/closing transactions. The main strategy seems to be around fee-bumping flexibility using RBF. Antoine Riard has put the resources to study here.
The Lightning Labs team answered some questions from the OKEx community in this AMA. They covered a number of issues, including declining BTC capacity and how to get Lightning into the hands of the people that need it the most in third-world countries. This comes on the heels of OKEx adding Lightning support for their exchange.
Economics, Engineering, Etc.
Jameson Lopp has a review of all interest-bearing Bitcoin services. To be fair, he’s only reviewing the signup process and the terms of service. Surprisingly, many of the ones he reviewed have some serious flaws in even that limited scope. If you are curious about how Bitcoin services can provide interest in BTC terms, Jump Capital has a great analysis.
Mitch Klee makes the case that the changing definition of CPI is used to manipulate people into thinking their fiat currency is a good store of value. The CPI is a very flawed metric and is a political weapon and articles like this are needed to orange-pill many precoiners. M2 growth is probably the closest thing we have to actual inflation and as we’ve seen in the last year, that is gaining traction as the real inflation number instead of CPI.
Venmo has followed CashApp in allowing purchases of Bitcoin on its app. They are unfortunately also allowing purchase of alts, which will probably make them something of an altcoin casino going forward, but at least it gives more people access to Bitcoin exposure in a convenient way.
It looks like the Valkyrie Bitcoin ETF is closer than any US Bitcoin ETF has been according to this report. The NYSE has filed to list the ETF and the SEC has 45 days to either accept or reject the application. Needless to say, a US-based ETF will make it much easier for institutional investors to buy Bitcoin. Whether the ETF will drive the price of Bitcoin remains to be seen.
Arthur Hayes once again writes in his own irreverential style. The main topic of this screed is how many people that talk to us really just want particular altcoins to buy as if we’re stock gurus. His question to them when they ask for the hot new altcoin to buy is a very good one: “Have you read the whitepaper?” There’s a lot more about banking and inflation which I liked, a bit about ETH which I didn’t but it’s all worth reading.
Brett Winton looks at how Solar Energy and Bitcoin have synergy. Their model predicts that the intermittent renewable sources of energy like Solar and Wind are made more steady and viable through Bitcoin mining. There’s something really interesting about how the energy generation can be made more useful and Bitcoin will soon become a necessary economic input to green energy. Their model is open source and on Github.
Lastly, I did a written debate about NFTs. I wouldn’t call the back-and-forth scintillating exactly, but perhaps you can find it useful to understand what sort of weird mental gymnastics NFT peddlers are using.
Another week, another Bitcoin article debunking energy FUD. And another.
I am going to be at Bitcoin 2021 June 4-5. I will also be at The Bitcoin Standard conference on August 12-14 in Mexico.
My Programming Blockchain seminar is next happening on June 1-2 in Miami and then on August 10-11 in Mexico. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.
On this week’s Bitcoin Fixes This, I talked to Robert Breedlove about metaphysics. We talked about economics as the practical intersection between philosophy and life. He posits that Bitcoin is the solution for all the incentive problems that ultimately lead to bad morals.
I also read through last week’s newsletter on clubhouse which you can find here. I was on Tone’s show to talk about Taproot and the hash rate crash. I debated Frances Coppola about Bitcoin vs. fiat on Blockdown and they interviewed me the next day for a Q&A as well.
I was interviewed by the Morgan Millenial Report and Decentralized Life about the new book:
Fiat delenda est.
Bitcoin Investors & commentators are still treating investors as all the same - like an amorphous mass - They are not. Those at the bottom of the ladder have little to invest and little to lose - those at the top who pay heaps of tax have not twigged to the advantages of gearing - which should take fear of losing out of the investment risk equation