This Financial Tool Can Help Protect You Against the Coming Crisis
A few years ago when my grandmother died, I had the task of going through her effects and selling off everything in the house. I was struck by a piece of paper. I still remember the day she signed it.
It was a carbon copy receipt for a certificate of deposit she and my grandfather had invested in at the now-defunct Louisiana National Bank. This was 1979. Inflation had ramped up to double-digits, and in the span of three years the Federal Reserve had jacked up interest rates to 14% from just 4.75%. CD rates had followed. And on a Saturday morning at the bank, my granny, an orphan with barely a high-school education, locked-in a 10-year CD paying 13.02%. She reflexively knew the economy was not functioning properly. So, she took advantage of the moment.
Once again, we’re caught in a moment when the economy functions improperly. The proximate cause is the coronavirus and Great Depression-like levels of joblessness. In truth, the U.S. economy has been flailing for two decades now. We’ve lurched from crisis to crisis. We’ve accumulated history’s largest collection of governmental debt. We’ve replaced middle-class jobs with low-wage service-sector jobs. And the Federal Reserve has taken interest rates to effectively 0% and soon they’ll likely go negative.
As I’ve noted many times, my aim with The Savvy Retiree is to help you save money, make money, and live a richer life. To that end, today’s column is essentially about all three.
A few weeks ago, I counseled why I fundamentally believe everyone should own some physical gold. Extreme debt, the possibility of a Greater Depression, and the inflationary sums of money the government will spend to save the economy are ingredients for an economic crisis.
When? Who knows?
Right now, the U.S. economy is a speeding motorcyclist who missed a turn and rammed a tree. Doctors are trying to save his life—amputating a leg comes later.
What I’m saying is that all actions have their reactions—at some point. In the moment, we don’t see the likely reactions because all we can see is the crisis at hand. But when those reactions arise, we will very likely feel them in the value of our U.S. dollars and our spending power. My best guess is inflation/stagflation.
But I’m not going to tell you about gold again (though you absolutely should buy some).
I’m going to tell you about…cryptocurrencies.
And, please, don’t stop reading.
Yes—cryptocurrencies absolutely are a risky venture. Yes—they are confusing as all get-out. And, yes—so many cryptocurrencies exist nowadays that it’s like trying to differentiate 412 shades of black.
Nevertheless, crypto is the future. Governments, central banks, and businesses large and small all over the world are working toward digital cash, primarily because crypto reduces costs, increases security, and speeds up transactions.
More important to my point, most cryptos exist in finite supply. Only so many Bitcoins will ever exist, for instance. In a world where governments willy-nilly can—and regularly do—print more money for whatever their needs, a currency that exists in limited quantity potentially has an advantage.
For that reason, I’ve been adding to my crypto portfolio for a while. A couple years ago, I actually built a miner from various computer parts so that I could understand the mining process myself. Since then, I’ve paid close attention to this world. I’ve seen prices bounce around like a 10-year-old on a sugar high. I’ve read the stories and done the research on the pros and cons of various coins. And I can say without hesitation that I would never counsel anyone to “invest” in crypto.
I absolutely would tell you that owning some crypto—not a lot—might well prove to be a fine way to protect yourself from an inflationary environment.
When (if) inflation emerges, investors, savers, and speculators will look for any asset that preserves purchasing power or that is likely to rise in value. Some of that action will be rational…some irrational. Either way, prices for many cryptocurrencies are very likely to rise, and possibly substantially.
Bitcoin, now about $9,000, was once nearly $20,000. Ethereum, now about $200, once topped $1,400. Nano, now at $0.63, once approached $38. I’m not saying that past is our future. I’m saying the past indicates what cryptocurrencies are capable of because of rational and irrational analysis…and an inflationary/stagflationary environment will birth both types of analysis.
A key point I will make is this: Beware of the currencies you own. Some suffer their own form of inflation in terms of the number of coins that regularly appear. That will neuter their utility as an “inflation fighter.”
To that end, I would consider coins such as:
• Bitcoin and Ethereum: As the two largest and best-known cryptos, they’ll suck up the bulk of the demand. And their coin-inflation rate is small.
• Nano and IOTA: Both have a fixed supply, and will suffer from no coin inflation. Moreover, they both have interesting uses as payment solutions (person-to-person with Nano; machine-to-machine with IOTA).
• ADA (Cardano): From the co-founder of Ethereum. It has limited coin inflation and ultimately could compete with both Ethereum and Bitcoin for primacy.
Others will likely do well, too. And if you see the wisdom of having a little bit of crypto in your portfolio, I encourage you to do more research to find currencies that resonate with your view of the future.
Whatever you choose, own multiple currencies, just as you would own multiple stocks. You don’t need to put a lot of money to work here. If, for instance, Nano were to return to $38, an investment of $800 today would be $50,000 in the future. I’m not predicting that will happen; it’s only an example of how little crypto you need to own to potentially have big impacts on your wealth.
Ultimately, this is all about preparation. Just as you would insure a car or a house or your life against dark moments, so too should you insure your lifestyle against darker economic possibilities. Crypto is just another way to prepare for a potential inflationary/stagflationary end to our current corona crisis.
Written by Jeff D. Opdyke