2024 February 6 What are Crypto and ETFs?

Hi, this is Jim Cranston from 7EveryMinute and 7EveryMinute.com, the podcast and website about reimagining your life. Thanks for joining me today to talk about cryptocurrency and cryptocurrency ETFs. So let's get started. If you like what you hear today, please leave a like, tell your friends, send me a message.

Tonight will be an interesting and relevant topic. In yesterday's paper, the Wall Street Journal had an article called Crypto Marketers Seek to Win Over Boomers.  That's what we're going to talk about tonight. It seems a little out of our normal theme, but it really does follow along because it's all about having a vision and having faith in yourself. Part of that is not to be swayed by marketing, especially marketing that just wants you to spend your money to be happy.  

Let me first start with the disclaimer. This is a very, very simplified explanation of cryptocurrency and investing. I'm not a broker, I'm not a financial advisor, and I'm not giving financial advice.  Always consult your own financial advisor and always exercise your own due diligence before ever investing in anything or altering your investment plan. You've been warned. I can say that from actual personal familial experience from someone who had a broker who talked them into taking their entire retirement fund and putting it into junk bonds. The person lost most of the money. I know it firsthand. 

There's a new push targeting Baby Boomers, who are perceived as the older people with money, and they see them as having available funds. They aren't as sophisticated in technology. If you want to know how to avoid this, listen on. First of all, we want to talk about cryptocurrency, Bitcoin, and ETFs ( exchange-traded funds).

What are those things? We'll start with cryptocurrency. Cryptocurrency was initially intended to be  an independent currency that wasn't tied to any specific country. This sounds simple enough. Cryptocurrency is simply an agreement that you own something, and the proof of your ownership is a secret number that someone can verify with very complicated mathematics called a cryptography algorithm that's very difficult to break.

What exactly do you own? It's just an agreement that somebody will pay you a certain amount of money if you tell them that secret number. That's both the interesting and the scary part of  cryptocurrency. There's nothing tangible involved at all. If somebody else figures out a way to get your secret number, they can take all of your cryptocurrency and it's completely gone.

There's no FDIC to insure it. Suddenly, poof! You're broke. It happens somewhat regularly.  It's not like shares of stock in a company or loaning someone money. It's just a promise to pay you if you can produce a secret number. That secret number is called a key.

It's a great big, long number. It has mathematical properties that make it unique. If someone gets the number from you, they have access to your account.  This is very simplified, but not as oversimplified as you might think. There's some fancy math going on with these secret numbers. That's basically it. It all revolves around you having a piece of information that proves your ownership of something, and that something is merely an agreement that somebody will pay you a certain amount of money for getting access to that number and what it represents. 

This is exactly why so many people are opposed to crypto, such as the various regulatory agencies and the large bankers. The value is often manipulated, even Bitcoin. The value changes dramatically, and there's very few safeties against large losses. But most of all, it's purely speculative. The way you make money in crypto is buying when it's low and selling when it's high, like any other investment. 

But normally, you invest in a company because they're doing something that's probably be profitable. There's a reason their stock price is going to go up. It's because they're actively doing something. There's nothing going on in crypto. It's nothing but a bunch of promises back and forth between people. That's the only thing driving it up. 

If you own stock in a company, you expect it to do well. It gives the stock an intrinsic value. But stocks will also pay dividends for the use of your money. That's all a stock is. You're buying a piece of the company,  They take that money that you pay for the stock, and they use it to do something. Hopefully they use it wisely and make more money. That makes the stock price go up, and you get your money back. They may also thank you with a dividend. That's how you make money with real stock.

If you loan a bank money, it pays you interest. If it goes out of business, the FDIC comes in and they guarantee that you'll get all your money back. The reason banks pay you interest is because they take your money, and they loan it out to somebody else. Then they charge that person interest.

Now we get to crypto. If a big crypto exchange like FTX goes bankrupt. That's life in the crypto market. There's nothing behind it. It's just speculation. There's nothing like the FDIC guarantees. Your money is just gone. It is truly speculative investing. Let's say you take the more conservative route, and you only trade in Bitcoin and maybe Ethereum. Those are the two biggest coins.

Bitcoin is like the original. It is one of the more stable coins. It's volatile. Look at Bitcoin's performance since 2022.  It had a high of nearly $63,000 per coin. A few months later, it was trading at $17,000.  That's about a 4x drop in value. 

I also looked up the forecast for 2024 about what Bitcoin was going to be. They said the range for Bitcoin could be as low as $35,000 a coin or as high of $120,000.  Does that sound like a stable investment? That's a 4:1 ratio over a one year period. 

Ignoring the volatility for a moment, what about if somebody steals it? If someone hacks into your bank, your savings are still insured.  If they hack into your wallet, and that's where you store your secret crypto keys, they just take your money and that's it. It's gone. There's no FDIC, nothing. The FBI sometimes tracks it down to get a fraction of it back, but usually, it's just gone.  

This happens pretty regularly. Itt happens by old-school tricks of social engineering like phishing.

Think of getting your Facebook account hacked.  Instead of getting a bunch of messages saying that you're stuck in Europe and you need a thousand dollars to get home, they take all of the savings that you had in crypto, and you don't find out until you go to check on your balance to see how it's doing and find out the balance is zero. That's what happens when you trade crypto directly. There's a very real risk to that. 

The current story though, is that this will all be solved with ETFs, or  exchange-traded funds. What are ETFs? They're a type of stock-like investment, so they're traded on an exchange like   the New York Stock Exchange. But instead of buying stock in a company, you're buying stock in a fund. The fund buys stock in companies. Mutual funds are great big funds by companies like Fidelity and Vanguard. They're these big companies that buy blocks of stock, and then you buy into the fund. The rationale behind them is that if you go buy a bunch of individual stocks and that one stock goes down, now you've lost a lot of money. 

But if you buy 10 or 100 stocks, the chances of all of them going down are much less. There's less risk. There's also less reward, but it's more stable. If you have any IRAs or investments like that,  almost everything that they have is held in funds or fund-like  investments. So exchange-traded funds came around on the basis that not everybody can afford to buy into a mutual fund. There are usually minimums to buy in, and they are significant investments. A lot of people just can't do that. So they came out with stocks that follow the fund. If the fund goes up, the price of the stock goes up, and so you can  share in the ups and downs of the fund without having to put so much money in up front. That's what an  exchange-traded fund is all about.

There's different kinds of funds. Whatever it is that the fund owns has a defined value. If you own part of a fund that includes Apple stocks, the value is intrinsically tied to the value of Apple stock.  It was just approved yesterday that you can now get ETFs. What they will own are either Bitcoin or futures on Bitcoin. So instead of following Apple stock, it'll be based around the value of Bitcoin. 

This is quite a difference, because Apple stock is based on a company that makes money by making products. Bitcoin is a very volatile non-commodity. It's essentially just a promissory note, and that makes it quite volatile. This ETF,  exchange-traded fund, is going to follow Bitcoin, not something tangible. 

That's  interesting, but think back for a second. Remember that 2024 prediction for Bitcoin was a low of $35,000 and a high of $120,000. That's a four to one price range.  If you're going to buy Apple stock, and Tim Cook, the Apple CEO, said in 2024, I think our stock (which is currently valued around 200 a share) could range anywhere from 100 to 400. Here's hoping it goes up! Would you invest in that? No, you'd run for the hills. You might lose half your investment, maybe more. 

Yet Bitcoin is like that all the time. Remember before, in 2022 to 2023, there was another 4:1 range.  But it gets worse, which is hard to believe. Bitcoin and crypto have been all the rage with all the cool people. There's stars getting sued for endorsing when they didn't know what they were endorsing.

Everyone wants to get more investment. What do they do? They market it to the people with the money that they see as easy targets.  Bitcoin is now running ads with the most interesting man in the world being interested in Bitcoin. His name is Jonathan Goldsmith, better known as the Dos Equis most interesting man in the world, expressing his interest in Bitcoin. This was before the ETFs were approved, so they weren't actually selling anything. They were just selling a concept. 

In the article, they interviewed the person  from the agency that put those ads together. They were absolutely targeting older investors with a familiar face.  Do not be swayed. The same rules apply to crypto ETFs as with any other investment.  Never speculate with more money than you can afford to lose. That's the number one rule of speculation, and crypto is pure speculation. 

Like any speculation, there may be gains to be had, but there are losses to be had as well.  Read the prospectus of the fund. Are there any guarantees? If the fund is hacked, what happens? Remember the FTX exchange? Those people might get back 50% of their investment if they're lucky, and it might be far less than that. 

These are things based upon non-tangibles. They're buying promissory notes. What if something happens and there's another huge run on Bitcoin and it goes back down to 17,000 again. If you went in at  40,000, you lose. It's just any other investment. There are funds that specialize in highly volatile stocks and highly volatile market segments. Cryptofund is just another volatile ETF. It's as volatile as the underlying asset, namely the cryptocurrency it's based on.

As a special bonus, if you trade any cryptocurrency directly, there are extensive federal and sometimes state, reporting requirements. They want to know all sorts of information about it. I'm not aware if crypto ETFs will also be subject to the same reporting requirements, but certainly a call to your financial advisors is probably in order.

Because they are so loosely regulated,  the FBI and everybody else wants to know who else is trading crypto and to what degree. That naturally ripples over to the IRS and ends up on tax forms. That's not true with your other investments. 

This is just a cautious and stern warning that, as a group, Baby Boomers are being targeted for these cryptocurrency ETFs.  They're doing all the things that you would expect them to do.  They get familiar faces to say comforting things. They'll put some small print at the bottom of the screen, sometimes even with a voiceover  I don't know if they can speed them up to the degree that I hear on radio ads, but they say a whole bunch of things, like with any investment there's a lot  risk of loss, blah, blah, blah. But it's not just any investment. It's an investment that's based on nothing. It is pure speculation. Keep that in mind and invest safely. 

Crypto is exciting. It's new, but it is highly volatile. Never forget that last part. It doesn't matter if you buy it directly or through new ETFs. The underlying investment is a volatile financial instrument. Especially since Baby Boomers are being specifically targeted. Be very cautious about any ads you may see. You'll probably start getting ads for ETFs. It's going to be happy, smiling actors, but don't trust that they guarantee good returns or wise investment. Always exercise appropriate caution, just like any other investment. Talk to your financial advisor. Don't be swayed. All the same rules apply as any other investment. 

Tonight was a little bit different. I don't normally talk about financials. I felt it was worthwhile to remind everyone it's still just an investment. Ignore the hype. Go back to basics. With any speculative investment, never invest more than you can afford to lose. 

That's it for tonight. Please remember the people in Ukraine. There are donation links at UKR7.com. You can also help through the World Central Kitchen at WCK.org. They operate not only in war zones, but anywhere there's disasters.

Even if you don't want, or aren't able, to invest in something overseas, there's a lot of people who need help right nearby, probably in your very own neighborhood. Anything you do to help anybody, even if it's just a smile, whatever you can to make somebody's day a little better. Remember, one of the best ways to care for yourself is to care for others. I can't emphasize it enough. It really changes your whole perspective on the world when you look outside yourself and look out into the rest of the world. It makes you realize how much you have and how much other people have to put up with. 

That's it. As always, thank you for stopping by. If you found something interesting or useful, please pass it along and please hit that like button. If not, please drop me a comment as to what you'd like to hear about. Have a great week. 

Before we close, remember that what I gave was an extremely simplified overview. If you're thinking about doing anything with crypto, read up on it, talk to experts on it. Really look into it. Use common sense. Don't look at all the ads. They're going to tell you how awesome it is, and  maybe you will make some money, maybe you will not, but it's just another investment. 

So that's it for tonight. Remember to live the life that you dream of because, that's the path to true contentment. Love and encouragement to everyone. See you next week on 7EveryMinute and 7EveryMinute.com. Thank you.